GIFT   OF 


NOTES  ON  FORMATION 

AND 

ORGANIZATION  OF  BUSINESS 

CORPORATIONS 
UNDER  THE  LAWS  OF  CALIFORNIA 

BY 

JAMES  S.  BENNETT 
OF  THE  LOS  ANGELES  BAR 


Copyright    1920.  by  Jamci  S.  Bennett 


CALIFORNIA  CORPORATIONS 


FORMATION  AND  ORGANIZATION 

Classification 

Purposes 

Powers 

Capital  Stock 

Shares  and  Securities 
Certificates 

Subscription  Agreements 

Offers  to  Purchase 
Sales 

Articles  of  Incorporation 

Governmental  Charges 
Organization 


BY-LAWS 

Required  by  Statute 

Adoption  and  Scope 

Enforcement  and  Amendment 

Records  and   Inspection 

Stock  and  Transfer  Book 

Stockholders 

Meetings  and  Quorum 

Voting  and  Representation 

Directors 

Qualifications  and  Vacancies 

Powers  and  Meetings 


FORMATION   AND   ORGANIZATION 

CLASSIFICATION. 

Under  the  English  practice,  the  term  "corporation" 
is  reserved  for  what  we  understand  as  "public  corpora- 
tions", while  the  term  "company"  includes  all  the 
various  forms  of  private  corporations  conducting  busi- 
ness for  profit.  The  Civil  Code  divides  corporations 
into  public  and  private  and  defines  private  corporations 
as  "all  those  formed  or  organized  for  purposes  other 
than  the  government  of  a  portion  of  the  state."1  A  ma- 
jority of  the  organizers  must  be  residents  of  California,2 
and  actual  residence  so  as  to  be  subject  to  the  process 
of  the  local  courts  is  intended,  not  citizenship  or  dom- 
icile. Our  more  recent  legislation  uses  the  term  "com- 
pany" with  the  meaning  used  in  English  practice,  and  in 
the  Corporate  Securities  Act  it  is  defined  to  include 
"all  private  corporations,  associations,  joint  stock  com- 
panies and  partnerships  of  every  kind,"3  and  also  par- 
ticipating business  trusts.  The  Railroad  Commission 
is  given  jurisdiction  of  all  public  utilities,  which  include 
common  carriers  and  all  public  service  pipelines,  gas, 
electric,  telephone,  telegraph,  water  and  warehouse 
companies.4  The  Superintendent  of  Banks  is  given 
jurisdiction  of  commercial  banks,  savings  banks  and 
trust  companies,  except  those  acting  solely  as  trustees 
under  deeds  to  secure  the  repayment  of  money.5  The 
Bureau  of  Building  and  Loan  Supervision  is  given 
jurisdiction  of  savings  and  loan  corporations  and  land 
and  building  corporations.6  The  Insurance  Commiss- 


1  Civil    Code,    Section    284. 

2  Civil    Code,    Section    285. 

3  Statutes,    1919,    page    231. 

4  Public   Utilities   Act   as   amended;    Stat.    1919,   page    493. 

6  Banking   Act   of   1909   as   amended;    Stat.   1919,   page   666. 

Civil    Code,    Section    290a. 

6  Statutes,    1911,    page   6. 


«,  t 


'and  Organisation 

ioner  is  given  jurisdiction  of  the  various  classes  of  in- 
surance corporations.  Aside  from  ordinary  business 
corporations,  the  Commissioner  of  Corporations  has  jur- 
isdiction of  homestead  corporations,7  mining  corpor- 
ations,8 cemetery  corporations,9  colleges  and  semin- 
aries of  learning,10  co-operative  business  corporations,11 
industrial  loan  companies,12  trust  companies  acting 
as  trustees  under  deeds  to  secure  the  repayment  of 
money,13  and  mutual  water  companies  having  a  capi- 
tal stock.  Companies  expressly  excepted  from  his 
jurisdiction  are:  companies  within  the  jurisdiction  of 
the  Railroad  Commission,  of  the  Superintendent  of 
Banks,  of  the  Insurance  Commission,  of  the  Bureau 
of  Building  and  Loan  Supervision ;  non-profit  corpora- 
tions, such  as  chambers  of  commerce,  religious,  social 
and  benevolent  corporations,  societies  for  the  prevention 
of  cruelty  to  children  and  animals,  agricultural  fair 
corporations ;  non-profit  co-operative  agricultural  as- 
sociations ;  non-profit  co-operative  corporations  organ- 
ized under  the  laws  of  this  state ;  and  banking  associa- 
tions and  other  corporations  organized  under  acts  of 
Congress  of  the  United  States.14  Private  companies 
for  profit  organized  under  state  law  naturally  divide 
themselves  into  the  four  classes  of  public  utilities,  sub- 
ject to  the  jurisdiction  of  the  Railroad  Commission ; 
moneyed  corporations,  subject  to  the  jurisdiction  of  the 
Superintendent  of  Banks,  the  Insurance  Commissioner 
or  the  Bureau  of  Building  and  Loan  Supervision ;  in- 
dustrial loan  companies  and  general  business  corpora- 
tions, subject  to  the  jurisdiction  of  the  Corporation 
Commissioner;  and  corporations  not  for  profit,  such  as 
social  and  quasi-governmental  purposes,  operating  with- 
out supervision.  A  logical  step  would  be  to  comUne 


7  Civil   Code,   Section   557. 

8  Civil  Code,   Section-  584. 

9  Civil  Code,  Section   608. 

10  Civil   Code,   Section    649. 

11  Civil    Code,    Section    653a. 

12  Statutes,    1917,    page    658. 

13  Civil  Code,   Section   290a. 

14  Statutes   1919,   page   231. 


Classification 

the  moneyed  corporations  under  the  supervision  of  a 
single  Commissioner,  and  to  provide  for  a  classification 
of  the  corporations  under  the  jurisdiction  of  the  Cor- 
poration Commissioner  into  agency  or  closed  joint  stock 
corporations  and  cpen  stock  business  corporations,  and 
expand  the  mining  corporation  into  an  exclusive  class 
dealing  with  wasting  assets  or  other  speculative  promo- 
tions. 

The  Corporation  Act  of  1850  vested  the  corporate 
powers  in  the  stockholders,  with  authority  to  delegate 
them  to  a  board  of  directors  or  trustees.1  Corporations 
organized  under  it  were  substantially  joint  stock  com- 
panies of  the  English  type.2  The  Corporation  Act  of 
1853  vested  the  corporate  powers  in  a  board  of  direct- 
ors so  that  it  did  not  derive  its  authority  from  the 
stockholders,3  and  the  powers  of  corporations  organ- 
ized under  this  Act  are  to  be  construed  by  the  prin- 
ciples applicable  to-  English  municipal  corporations,  as 
they  consolidated  with  the  guilds  and  extended  their 
operations  to  business  affairs.  The  two  forms  existed 
with  many  modifying  amendments  until  they  were  com- 
bined into  a  single  system4  by  the  Civil  Code  of  1872 
and  most  of  the  vagrant  provisions  dealing  with  the 
participation  of  stockholders  in  the  management  of  the 
business,  the  regulation  of  its  affairs5  and  the  election 
of  officers6  are  to  be  traced  to  this  joint  stock  source. 
The  joint  stock  contract  form  of  corporation  had  be- 
come firmly  established  and  continues  to  manifest  itself 
in  decisions  of  our  courts  hard  to  reconcile  with  pres- 
ent statutory  provisions.  Where  no  rights  of  creditors 
are  involved7  and  the  stock  is  issued  with  no  present 
intention  of  selling  to  the  public8  and  all  subscribers 
and  stockholders  consent,  the  courts  are  inclined  to 
recognize  the  right  of  the  stockholders  to  issue  shades 


1  Statutes   1850,   page   347. 

2  Chater  v.   S.  F.   Sugar  Refining  Co.,   19   Cal.   220,   246. 

3  Statutes,   1853,  page  87. 

4  Smith  v.   S.   F.   &   N.   P.  Ry.   Co.,   115   Cal.   584,    590. 

5  Civil   Code,    Section    354,    subd.    6. 

6  Civil    Code,    Section    318. 

7  Whitten   v.    Dabney,    171    Cal.    621. 

8  Turner   v.    Markham,    155    Cal.    562. 


10  Formation  and  Organisation 

for  any  consideration  upon  which  they  may  agree.9 
The  corporation  is  regarded  as  the  agency  of  the  stock- 
holders managing  their  property,  to  which  it  holds  the 
legal  title  for  purpose  of  convenience,10  and  the  stock 
certificates  are  regarded  as  evidence  of  the  proportion 
in  which  the  co-tenancy  is  divided.  It  would  tend 
greatly  to  clarity  in  our  law  if  this  class  of  closed  stock 
corporations  were  distinguished  by  statute  from  general 
business  stock  corporations  and,  following  the  English 
practice  of  registration,  its  shares  allowed  to  be  trans- 
ferred only  by  registry  in  the  office  of  the  Commissioner 
of  Corporations.  The  shares  of  stock  in  such  corpora- 
tion should  not  be  issued  to  represent  property  con- 
veyed to  it  where  the  beneficial  interest  is  retained  in 
the  stockholders  and  the  corporation  could  then  prop- 
erly be  authorized  to  convey  such  property  or  distri- 
bute the  proceeds  to  its  stockholders  under  the  sanction 
of  the  Commissioner  of  Corporations11  without  vio- 
lating the  fundamental  concepts  of  capital  stock.  The 
Act  of  1917  authorizing  shares  without  nominal  or  par 
value12  classifies  corporations  as  to  form  of  organiza- 
tion without  limitation  as  to  class  of  business  except 
public  utilities  which  are  authorized  to  organize  in  this 
form  by  a  separate  act.13  The  War  Tax  Law  of  1918 
introduced  an  innovation  by  creating  the  "personal 
service  corporation,"  where  the  "income  is  to  be  as- 
cribed primarily  to  the  activities  of  the  principal  own- 
ers or  stockholders  who  are  themselves  regularly  en- 
gaged in  the  active  conduct  of  the  affairs  of  the  corpor- 
ation and  in  which  capital  (whether  invested  or  bor- 
rowed) is  not  a  material  income  producing  factor;  not 
including  any  corporation  fifty  per  centum  or  more  of 
whose  gross  income  consists  either  of  gains,  profits 
or  income  derived  from  trading  as  a  principal,  or  of 


9     Whitten   v.    Dabney,    171    Cal.    621. 

10  MacDermot   v.   Hayes,    176   Cal.   95,    114; 
Sargent   v.    Palace   Cafe   Co.,    176   Cal.    737; 
Garrettson  v.   Crude   Oil   Co.,   146   Cal.   184. 

11  Civil   Code,   Section   309. 

12  Statutes   1917,   page   1321. 

13  Statutes  1917,   page   1367. 


Purposes  and  Powers  11 

gains,  profits,  commissions  or  other  income  derived 
from  a  government  contract  or  contracts  made  between 
April  6, 1917,  and  November  11, 1918,  both  inclusive."1 

PURPOSES  AND  POWERS. 

A  corporation  is  a  creature  of  the  law1  having  a  life 
stated  in  its  articles  of  incorporation  not  to  exceed  fifty 
years,2  which  may  be  extended  for  a  period  not  ex- 
ceeding fifty  years  from  the  date  of  such  extension 
by  the  vote  or  written  consent  of  stockholders  repre- 
senting two-thirds  of  its  capital  stock,3  and  may  be 
formed  by  the  voluntary  association  of  three  or  more 
persons,  a  majority  of  whom  must  be  residents  of  this 
state,  in  the  manner  provided  by  law,4  for  any  purpose 
for  which  individuals  may  lawfully  associate  them- 
selves5 and  having  powers  and  duties  of  natural  per- 
sons,6 to  sue  and  be  sued,7  to  make  and  use  a  com- 
mon seal  and  alter  the  same  at  pleasure,8  and  to  pur- 
chase, hold  and  convey  real  estate  as  the  purposes  of 
the  corporation  may  require,  but  not  to  hold  such  real 
estate  for  longer  than  five  years,  except  such  as  may 
be  necessary  for  carrying  on  its  business,9  unless  it 
is  organized  for  the  purpose  of  dealing  in  real  estate,10 
and  not  then  if  a  majority  of  its  stock  is  owned  by 
aliens  who  may  not  become  citizens  by  naturalization,11 
and  may  not  issue  bills  for  circulation  as  money;12  nor 
take  property  by  last  will  and  testament;13  nor  engage 
in  business  other  than  that  expressly  authorized  in  its 


14  War  Revenue  Act,   1918;   Sees.   200   and   218. 

1  Civil    Code.    Section    293. 

2  Civil   Code,    Section   290,   subd.    4. 

3  Constitution*,   Article  XII,   Section   7. 

4  Civil    Code,    Section    286. 

5  Civil    Code,-  Section    286. 

6  Civil   Code,   Section    283. 

7  Constitution,  Article  XII,  Section  4; 
Civil  Code,  Section  354. 

8  Civil  Code,  Section  354. 

9  Constitution,   Article   XII,    Section    9. 

10  Market  St.   Ry.   Co.   v.   Hellman,   109   Cal.    590. 

11  Statutes  1913,   page  206. 

12  Constitution,  Article  XII,  Section  6; 
Civil  Code,   Section  366. 


12  Formation  and  Organisation 

charter  or  by  the  law  under  which  it  may  have  been 
organized  ;14  nor  possess  or  exercise  any  powers  ex- 
cept those  enumerated  and  given  by  law  or  necessary 
to  the  exercise  of  those  so  given.15 

By  amendment  to  the  Civil  Code  adopted  in  1905, 
any  corporation  by  unanimous  vote  of  all  the  directors 
at  any  regular  meeting  is  authorized  to  acquire  and 
hold  the  lands  and  buildings  of  and  in  which  its  busi- 
ness is  carried  on,  and  to  improve  the  same  to  the 
extent  required  for  the  convenient  transaction  of  its 
business.16  If  this  should  be  construed  as  a  power, 
it  would  probably  be  unconstitutional  as  to  such  cor- 
porations as  did  not  require  lands  and  buildings  for 
its  authorized  purposes ;  but  construed  as  writing  into 
the  charter  of  each  corporation  the  purpose  to  acquire 
lands  and  improve  with  buildings,  it  is  valid.  A  dis- 
tinction is  to  be  drawn  between  the  purposes  of  a  cor- 
poration and  its  powers.17  The  fact  that  the  powers 
are  incidental  to  the  purposes  and  are  lodged  in  the 
board  of  directors  by  statute  makes  it  important  to  state 
the  fundamental  purposes  or  business  of  the  corpora- 
tion broadly  in  its  articles  so  that  the  required  powers 
will  be  incidental  to  some  of  the  purposes  stated,  and 
yet  with  such  limitation  that  the  board  of  directors 
may  not  divert  the  capital  to  speculations  beyond  the 
intent  of  the  subscribers.  The  purposes  stated  do 
not  fix  the  character  of  the  corporation  in  its  future 
activities,  but  merely  give  to  the  corporation  capacity 
to  engage  in  the  business  stated.18  For  instance, — 
a  corporation  whose  stated  purpose  is  to  manufacture 
lumber  and  all  articles  of  wood  and  which  is  actually 
engaged  in  that  business  has  the  implied  power  to 
operate  a  railroad  reasonably  necessary  in  its  business, 
but  not  to  operate  a  railroad  for  traffic,19  a  rail- 
is  Civil  Code,  Section  1275. 

14  Constitution,   Article  XII,   Section   9. 

15  Civil    Code,    Section   355. 

16  Civil   Code,   Section   360. 

17  Conference    Free    Baptists   v.    Berkey,    156    Cal.    470. 

18  Allen    v.    Railroad    Commission,    55    Cal.    Dec.    110-    56    Cal 

Dec.   326. 

19  People   v.    Mt.    Shasta    Mfg.    Co.,    107    Cal.    266. 


Capital  Stock  13 

road  company,  upon  leasing  a  system,  may  guarantee 
the  bonds  of  the  lessor  issued  for  the  construction 
of  the  leased  system;20  and  a  trading  corporation  may, 
upon  transfer,  guarantee  the  payment  of  obligations 
received  from  its  customers  and  their  purchasers  from 
third  parties.21  To  act  as  a  financial  agent  is  a  proper 
purpose  of  a  corporation,22  as  is  the  business  of  acting 
as  agent  for  its  stockholders  only,23  in  which  event 
the  property  conveyed  to  the  corporation  for  its  shares 
is  held  in  trust  for  its  stockholders  except  as  against 
creditors.  Since  the  amendment  to  the  Civil  Code  in 
1917,  before  such  property  or  its  proceeds  is  distri- 
buted, the  permit  of  the  Commissioner  of  Corporations 
should  be  obtained.24 

CAPITAL  STOCK. 

Unless  first  authorized  by  the  Commissioner  of  Cor- 
porations, directors  of  corporations  must  not  divide, 
withdraw  or  pay  to  the  stockholders  any  part  of  the 
"capital  stock",  nor  reduce  or  increase  the  "capital 
stock",  except  as  provided  in  Section  359  of  the  Civil 
Code.1  In  construing  this  section,  the  Supreme  Court 
has  not  seen  fit  to  apply  the  rule  that  words  repeated- 
ly used  in  the  same  statute  will  be  presumed  to  bear 
the  same  meaning,2  but  has  contsrued  the  term  "cap- 
ital stock"  as  first  used  to  mean  the  consideration  paid 
to  the  corporation  for  its  shares,3  although  as  next 
used  it  clearly  refers  to  authorized  share  capital  of  the 
corporation.4  In  contemplation  of  law,  the  considera- 
tion paid  to  the  corporation  should  equal  the  par  value 
of  the  shares  issued  for  it,  and  from  this  has  grown  the 

20  Low  v.   Central   Pac.  R.   R.   Co.,   62   Cal.    63. 

21  Armour  &  Co.  v.  Rosenberg-  &  Sons?    26  Cal.  App.   Dec.   773. 

22  Christie   v.    Sherwood,    113    Cal.    631. 

23  Baldwin   v.   Miller   &  Lux,    162   Cal.   454. 

24  Civil    Code,    Section    309. 

1  Civil   Code,    Section    309. 

2  McCarthy    v.    Board    of    Fire    Commissioners,    26    Cal.    App. 

Dec.    1190. 

3  Tapscott   v.   Mexican    Colorado    etc.    Co.,    163    Cal.    664.    668; 
Schulte   v.   Boulevard   Gardens   Land   Co.,    164    Cal.    464. 

4  Civil  Code,   Section   369. 


14  Formation  and  Organization 

confusion  in  the  use  of  the  term  "capital  stock"  as 
applied  indiscriminately  to  the  consideration  received  by 
the  corporation  and  the  shares  of  stock  issued  for  that 
consideration.  When  the  share  stock  is  issued  at  a 
premium  the  corporate  surplus  so  created  is  not  profits 
arising  in  the  business  available  for  dividends,  nor  at 
all  divisible  among  the  shareholders  by  the  board  of 
directors5  without  the  consent  of  the  Commissioner 
of  Corporations.6  To  avoid  this  situation,  subscribed 
shares  should  be  paid  for  at  par,  and  if  an  operating 
surplus  in  desired  the  amount  should  be  donated  by  the 
subscribers  in  proportion  to  their  shares  after  the  sub- 
scription shares  are  issued,  and  the  terms  of  the  dona- 
tion should  be  distinctly  stated  in  the  deed  of  gift. 
Where  the  shares  are  purchased  the  underwriting 
agreement  or  other  contract  of  purchase  should  pro- 
vide that  the  surplus  obtained  from  such  premiums 
may  be  divided  among  the  shareholders  in  the  discre- 
tion of  the  board  of  directors,  with  specific  provision 
that  it  shall  not  be  a  part  of  the  capital  stock  but 
shall  be  a  loan  to  the  corporation  by  the  purchasers 
of  the  shares,  returnable  at  the  discretion  of  the  board 
of  directors  without  interest.  This  distinction  between 
capital  derived  from  premiums  and  other  surplus  ac- 
counts is  avoided  where  the  corporation  is  organized 
with  shares  without  nominal  or  par  value  ;7  in  which 
case  the  amount  of  the  capital  stated  must  be  paid  to 
the  corporation  in  actual  value  before  it  begins  busi- 
ness and  must  not  be  reduced  by  distribution  to  stock- 
holders, but  there  is  nothing  to  prevent  the  distribu- 
tion of  other  addition  to  capital,  whether  acquired 
from  premiums,  donations,  assessments,  or  by  the  sale 
of  additional  shares  for  the  consideration  prescribed  in 
the  articles.  The  language  of  the  statute  is  uncer- 
tain as  to  whether  all  the  authorized  shares  must  be 
issued  for  the  stated  capital,  but  in  view  of  the  auth- 


6     Merchants    &    Insurers    Reporting    Co.    v.    Youtz,    27    Call 
App.    Dec.    889. 

6  Civil  Code,   Section   309. 

7  Statutes    1917,    page    1321. 


Shares  and  Securities  15 

ority  granted  to  sell  shares  it  seems  reasonable  that  a 
lesser  number  may  be  so  issued,  particularly  as  this 
construction  aids  the  main  purpose  of  the  act,  vis,  the 
avoidance  of  bonus  stock  and  watered  treasury  shares. 
Where  shares  preferred  as  to  principal  are  authorized 
all  of  the  shares  must  be  issued  for  the  stated  capital. 

SHARES  AND  SECURITIES. 

The  rights  of  shareholders  may  be  classified,  but  no 
distinction  is  permitted  between  classes  of  stock  or  the 
owners  thereof,  either  as  to  voting  power  or  liability 
to  creditors,  and  shares  of  different  classes  must  all 
have  the  same  par  value.1  This  rule  applies  where 
shares  are  issued  without  nominal  or  par  value  if  the 
preferred  shares  have  a  preference  as  to.  principal.2 
This  leaves  the  corporation  free  to  divide  its  shares  and 
give  any  degree  of  preference  as  to  income  or  capital 
assets  to  different  classes  of  shares.  By  proper  pro- 
visions incorporated  in  the  articles,  certificates  and  con- 
tract of  sale,  shares  may  be  protected  against  assess- 
ment by  the  corporation3  and  given  qualified  redemp- 
tion or  convertible  conditions.4  While  the  corporation 
may  not  issue  shares  of  stock  without  voting  power  or 
liability  to  creditors,  it  may  issue  bonds  with  a  maturity 
date  fixed  at  the  expiration  of  the  corporate  charter, 
bearing  interest  payable  only  out  of  the  profits,  and 
either  cumulative  or  non-cumulative,  and  such  bond 
issue  may  be  created  at  the  time  the  corporation  is 
organized  and  before  the  capital  stock  is  issued  beyond 
the  necessary  subscription  shares.  This  form  of  un- 
secured debenture  is  useful  to  represent  the  subscrip- 
tions frequently  taken  to  secure  the  location  of  a  busi- 
ness considered  beneficial  to  the  community  and  which 
could  not  be  secured  without  special  inducements.  The 
provision  of  the  code  that  directors  must  not  create 

1     Civil   Code,   Section   290; 

Film  Producers   v.   Jordan,   171   Cal.   664. 
Statutes  1917,  page   1321. 

3  Lum  v.   American   Wheel   Co.,   166   Cal.   657; 
Riverside  Land   Co.   v.   Jarvis,   174   Cal.    316. 

4  Schulte  v.  Boulevard  Gardens  Land   Co.,   164   Cal.   464. 


16  Formation  and  Organisation 

any  debts  beyond  the  subscribed  capital  stock  refers 
to  the  actual  creation  of  the  debt,  and  a  bond  issue 
may  be  authorized  in  excess  of  the  subscribed  capital 
stock,  provided  it  does  not  exceed  the  authorized  cap- 
ital stock,  and  the  face  value  of  the  issued  bonds  does 
not  exceed  the  total  amount  of  the  subscribed  stock,5 
or  in  the  case  of  shares  without  par  value  the  amount 
of  the  stated  capital. 

Property  is  the  right  to  use  or  possess  things,  or  the 
right  to  acquire  the  use  or  possession  of  things.  These 
rights  are  commonly  evidenced  by  certificates  issued 
under  authority  of  the  state,  whether  they  be  called 
deeds,  agreements,  checks,  notes,  bills  of  exchange, 
certificates  of  stock,  bonds  or  trust  certificates.  The 
convenient  dispatch  of  business  requires  that  these 
certificates  truthfully  and  intelligently  state  or  give  ade- 
quate notice  of  the  rights  which  they  represent.  The 
partnership,  the  joint  stock  association,  the  participat- 
ing trust,  and  the  corporation  all  present  efforts  to 
assemble  various  forms  of  these  property  rights,  pos- 
sessed by  many  persons,  combine  them  into  a  common 
credit  force,  provide  for  the  control  of  this  force,  pro- 
tect the  unassociated  property  rights  of  the  parties  and 
provide  for  the  representation  of  the  new  rights 
created  by  the  assembling  of  this  common  credit 
force.  This  assembled  credit  force  is  the  "capital"  of 
the  enterprise;  its  control  is  vested  in  a  managing 
body;  the  form  of  protection  to  uncontributed  rights 
is  limited  liability,  and  the  new  rights  created  are  the 
profits  of  organizing  the  enterprise.  The  essential 
qualities  of  the  certificates  representing  the  assembled 
rights  are  that  they  truthfully  certify  to  the  rights 
represented  in  their  respective  classes  and  that  the 
various  rights  be  made  and  kept  easily  transferrable  in 
order  to  make  and  keep  fluid  the  capital  they  repre- 
sent. The  absence  of  authority  to  issue  a  security 
representing  a  right  to  vote  and  a  share  in  the  profits 
created  by  successful  management,  without  capital  in- 

5     Merced   River   Elec.   Co.  v.   Curry,   167   Cal.   727. 


Shares  and  Securities  17 

vestment,  lies  at  the  root  of  the  issue  of  most  bonus 
securities. 

The  securities  issued  will  represent  either  intangible 
or  tangible  rights,  or  a  combination  of  the  two,  and 
the  subscription  agreement  or  contract  of  purchase 
should  clearly  state  the  character  of  the  right  to  be 
represented.  Invested  capital,  under  the  Excess  and 
War  Profits  Tax  Law,  includes  "tangible  property", 
defined  as  stocks,  bonds,  notes  and  other  evidence  of 
indebtedness,  bills  and  accounts  receivable,  leaseholds 
and  other  property  other  than  intangible  property; 
and  "intangible  property",  defined  as  patents,  copy- 
rights, secret  processes  and  formulae,  goodwill,  trade 
marks,  trade  brands,  franchises  and  other  like  prop- 
erty.1 Intangible  property,  bona  fide  purchased  for 
cash,  is  to  be  included  in  invested  capital  at  full  value, 
but  intangible  property  paid  for  in  stock  or  shares 
on  or  after  March  3,  1917,  is  not  allowed  as  invested 
capital  in  excess  of  twenty-five  per  centum  of  the  par 
value  of  the  total  stocks  or  shares  of  the  corporation 
outstanding  at  the  beginning  of  the  taxable  year.2 
From  the  standpoint  of  the  income  and  excess  profit 
tax  law,  it  is  therefore  desirable  in  incorporating  a 
company  to  take  over  a  going  business,  or  to  exploit 
any  property  represented  by  intangible  certificates,  to 
issue  shares  for  the  intangibles  to  approximately 
twenty-five  per  cent  of  the  total  shares  issued.  This 
proceeding,  however,  should  be  followed  cautiously,  as 
where  property  is  transferred  to  a  corporation  in  ex- 
change for  its  stock,  the  exchange  constitutes  a  closed 
transaction  and  the  former  owner  of  the  property 
realizes  a  gain  or  loss  if  the  stock  has  a  market  value 
and  such  market  value  is  greater  or  less  than  the  cost 
or  the  fair  market  value  as  of  March  1,  1913,  (if  ac- 
quired prior  thereto)  of  the  property  given  in  ex- 
change.3 Incorporation  papers  representing  to  state 
officers  that  the  property  had  been  paid  for  by  stock 

1  War   Revenue  Act,   1918,   Section   325a. 

2  War    Revenue    Act    1918,    Section    326a. 

3  Internal    Revenue    Regulations,    Article    1666. 


18  Formation  and  Organisation 

of  fair  value  equal  to  the  par  value  of  the  stock  will 
undoubtedly  constitute  evidence  against  the  incorpora- 
tors  in  any  effort  to  show  that  the  stock  has  no  market 
value,  and  the  stockholders  may  thus  be  required  to 
pay  an  income  tax  based  on  market  value  of  shares 
of  stock  taken  at  a  grossly  excessive  value.  Where 
agency  corporations  are  organized,  care  must  be  taken 
to  keep  them  strictly  within  the  limits  of  "personal 
service  corporations",  and  if  this  is  not  possible  a  part- 
nership form  of  organization  should  be  used.  Other- 
wise, the  parties  interested  may  be  found  paying  an 
income  and  excess  profits  tax  many  times  greater  than 
their  competitors  doing  the  same  business.  Such  in- 
equalities reach  very  large  figures.  An  additional  tax 
of  $10,000  due  merely  to  a  different  form  of  organiza- 
tion is  not  unknown  in  this  district.  Under  a  ruling 
by  the  Secretary  of  State,  a  California  corporation  with 
stock  having  a  par  value  cannot,  by  amendment  to  its 
articles,  change  its  stock  to  shares  without  par  value. 
Until  a  decision  is  obtained  permitting  this  change 
our  corporations  are  excluded  from  increasing  the 
number  of  such  shares  representing  its  assets  without 
income  tax  on  the  new  snares. 

CERTIFICATES  OF  STOCK. 

Each  stockholder  of  the  company  whose  stock  has 
been  paid  for  in  full  is  entitled  to  a  certificate  or  certi- 
ficates showing  the  amount  of  the  stock  of  the  com- 
pany standing  on  the  books  in  his  name.1  Where  stock 
is  to  be  issued  before  being  paid  in  full,  the  provision 
for  its  issue  should  be  included  in  the  by-laws,  which 
should  contain  restrictions,  purposes  and  conditions  of 
its  issue,  and  any  certificate  for  stock  not  fully  paid 
must  show  on  its  face  what  amount  has  been  paid  on 
the  stock  represented  thereby.2  Where  different  classes 
of  stock  are  authorized,  the  certificates  must  also  state 
the  number  of  authorized  shares  of  each  class  and  th« 


1  Civil   Code,   Section   323. 

2  Civil    Code,    Section   323. 


Certificates  of  Stock  19 

nature  and  extent  of  the  preferences  granted  the  pre- 
ferred stock.3  Where  stock  without  nominal  or  par 
value  is  authorized,  the  certificate  should  not  desig- 
nate any  nominal  or  par  value,4  even  though  the  art- 
icles of  incorporation  give  the  preferred  shares  a  par 
value  and  a  preference  as  to  principal  in  a  designated 
amount.  Whenever  the  articles  impose  any  burden 
upon  the  shares  or  they  are  issued  on  condition,  such 
as  the  option  to  resell  to  the  corporation,5  or  condi- 
tioned that  they  shall  not  be  subject  to  assessment, b 
or  that  the  title  shall  pass  with  the  conveyance  of 
certain  real  estate,7  or  whenever  the  by-laws  impose 
a  lien,8  or  restriction  on  transfer  or  make  the  shares 
appurtenant  to  land  in  a  mutual  water  company,9  or 
whenever  the  corporation  has  notice  of  the  rights  of 
third  parties  in  the  shares,  a  notation  of  any  such  pref- 
erences or  limitations  should  be  entered  in  the  stock 
and  transfer  book  and  noted  on  the  certificate  to  bind 
the  purchaser  of  such  shares.10  Each  certificate  should 
be  numbered,  bear  the  signature  of  the  president  and 
secretary,11  and  the  seal  of  the  corporation,  and  be 
issued  in  numerical  order  from  the  stock  certificate 
book  and  a  full  record  of  each  certificate  of  stock  as 
issued  should  be  entered  on  the  corresponding  stub  of 
the  stock  certificate  book  and  the  receipt  of  the  new 
owner  taken,  with  his  address.12  Certificates  of  stock 
are  not  negotiable  instruments13  but  statements  of 
certain  facts  appearing  of  record  on  the  books  of  the 
corporation,  certified  to  by  its  principal  officers,  and  a 
true  statement  with  full  disclosure  of  what  the  books 
show  in  regard  to  the  shares  should  be  the  controlling 

2  Civil   Code,    Section    323. 

4  Statutes    1917,    page    1321. 

6  Schulte   v.    Boulevard   Gardens   Land   Co.,    164   Cal.    469. 

6  Lum  v.  American  Wheel  etc.  Co.,  165  Cal.   661. 

7  ^Riverside   Land    Co.    v.    Jarvis,    174    Cal.    326. 

8  Jenninge    v.    Bank    of    California,    79    Cal.    323. 

9  Civil   Code,    Section    324. 

10  Young:  v.   New   Standard   etc.   Co.,   148   Cal.    310. 

11  Civil   Code,   Section   323. 

12  Civil   Code,   Section   324. 

13  O'Dea   v.    Hollywood   Cemetery   Association,    164    Cal.    72; 
Geary   St.   R.   R.    Co.    v.   Bradbury  Estate   Co.,    66   Cal.    Dec. 

312. 


20  Formation  and  Organisation 

feature.  The  board  of  directors  should  be  authorized 
in  its  discretion  to  appoint  a  transfer  agent  and  regis- 
trar of  transfers,  and  in  such  event  to  require  that  all 
stock  certificates  thereafter  issued  bear  the  signature 
of  such  appointees.  The  by-laws  should  provide  the 
conditions  upon  which  a  new  certificate  will  be  issued 
in  case  of  loss  or  destruction,  which  usually  should 
provide  for  the  giving  of  a  bond  with  sufficient  sure- 
ties as  indemnity  against  any  loss  or  claim  against  the 
corporation ;  otherwise  action  must  be  brought  in  the 
Superior  Court.14  The  statute  in  respect  to  bonds 
provides  for  the  issue  of  a  new  bond  only  when  the 
old  one  is  lost  or  destroyed  by  conflagration  or  other 
public  calamity.15 

SUBSCRIPTION  AGREEMENT. 

Unless  a  copy  of  the  proposed  articles  of  incorpora- 
tion is  identified  in  or  made  an  exhibit  to  the  sub- 
scription agreement  it  should  name  the  directors  pro- 
posed for  the  first  year,  state  the  principal  purpose  of 
the  corporations,  the  classes  of  securities,  limit  the 
number  of  shares  which  may  be  subscribed  before  in- 
corporation and  authorize  the  substitution  of  other 
persons  for  those  named  as  directors,  either  by  the 
particular  financial  interest  each  director  represents  or 
by  a  majority  of  the  persons  so  named.  As  promoters, 
the  persons  named  as  directors  should  be  authorized  to 
prepare  the  articles  of  incorporation  and  the  form  of 
securities,  with  explicit  authority  to  enlarge  the  pur- 
poses stated.  General  authority  is  not  sufficient,  as 
subscribers  will  not  be  bound  to  take  stock  in  a  cor- 
poration organized  for  purposes  other  than  those  stated 
in  their  subscription  agreement.1  The  subscribers  named 
in  the  articles  will  later  adopt  the  by-laws  and  by  fixing 


14  Civil  Code,   Section   328. 

15  Civil   Code,   Section   329; 

Brown   v.   Anderson   etc.    Dist.,    28    Cal.    App.    Dec.    1067. 

1     Marysville   etc.   Co.   v.    Johnson,    109   Cal.    192; 

Hanford   Mercantile   Store   v.    Sowlveere,    11   Cal.    App.    261. 


Subscription  Agreement  21 

the  date  of  the  annual  meeting  determine  the  period  of 
control  by  the  directors  named  in  the  articles,  subject 
to  the  right  of  the  stockholders  to  remove  the  board 
by  two-thirds  vote  of  the  stock  or  to  change  the  n am- 
ber of  the  board  by  a  majority  vote.  Accordingly,  sub- 
scriptions to  shares  before  incorporation  should  be 
limited  to  the  real  parties  in  interest  or  their  nominees, 
and  the  subscription  shares  prorated  among  them  ac- 
cording to  their  several  interests.  Both  the  promoters2 
and  the  subscribers3  occupy  fiduciary  relations  to  each 
other,  and  where  it  is  contemplated  that  shares  nom- 
inally issued  to  them  are  to  be  sold  to  others,  the 
fiduciary  relation  is  extended  to  their  purchasers,4  with 
the  corresponding  duty  to  make  full  disclosure  of  any 
special  advantage;  but  where  at  the  time  of  organiza- 
tion there  is  no  intent  to  offer  the  shares  to  others5  the 
fiduciary  relation  is  not  so  extended.  The  most  satis- 
factory method  is  to  limit  the  number  of  subscription 
shares  to  the  smallest  number  which  will  proportion- 
ately represent  the  different  interests  involved  and  for 
such  shares  to  be  subscribed  for  in  cash  at  par,  with 
a  consent  that  additional  shares,  either  open  or  to  a 
fixed  amount,  may  be  sold  by  the  board  of  directors 
without  first  being  offered  to  the  subscribers.  In 
its  simplest  form,  the  subscription  agreement  is  con- 
tained in  the  articles  of  incorporation,  where  all  the 
subscribers  are  named  as  directors  for  the  first  year. 
This  leaves  the  substantial  terms  of  the  agreement  be- 
tween the  promoters  to  be  worked  out  in  a  sales  con- 
tract or  underwriting  plan.  The  subscription  agree- 
ment may  be  executed  in  a  number  of  parts,  and 
where  the  subsequent  parts  show  on  their  face  that 
they  are  intended  as  a  subscription  for  a  specific  num- 
ber of  shares  in  the  same  corporation  as  the  first  or 
principal  subscription  agreement  the  fact  that  the  list 
of  subscribers  named  in  the  first,  or  the  exhibits 


2  Burbank   v.   Dennis,    101   Cal.    101. 

3  Lomita  Land   &  Water  Co.   v.   Robinson,    154   Cal.    36. 

4  California  Calaveras   Min.   Co.  v.   Walls,   170   Cal.    285,  292. 

5  Whittert  v.    Dabney,    171    Cal.    621,    624. 


22  Formation  and  Organisation 

attached  thereto,  are  not  annexed  to  the  subsequent 
parts,  will  not  destroy  the  legal  unity  of  the  different 
parts  as  one  agreement.6  Original  subscribers  are  not 
compelled  to  take  stock  issued  to  and  owned  by  others, 
but  are  entitled  to  stock  issued  directly  from  the  cor- 
poration ;7  but  where  all  the  stock  has  been  issued  and 
a  part  returned  to  the  corporation  as  treasury  stock 
and  there  is  no  showing  but  what  it  was  a  partial 
rescission  for  want  of  adequate  consideration,  it  may 
be  regarded  as  unissued  stock  for  the  purpose  of 
delivery  to  a  subscriber.8  It  is  not  necessary  that  all 
the  subscribers  sign  the  articles9  and  the  preliminary 
subscriptions  inure  to  the  benefit  of  the  corporation 
when  it  is  organized10  as  contemplated  in  the  agree- 
ment, and  thereafter  both  the  corporation  and  the  sub- 
scribers are  bound.  One  not  named  in  the  articles  of 
incorporation  is  not  strictly  a  subscriber,  but  where  he 
enters  into  an  agreement  in  the  form  of  a  subscription 
to  pay  the  trustee  when  organized  and  receives  shares 
of  stock  he  becomes  a  stockholder  by  purchase  and  the 
corporation  can  sue  to  collect  the  agreed  value  of  the 
shares  as  the  real  party  in  interest.11  Where  the  sub- 
scription agreement  does  not  provide  for  the  time  and 
place  of  payment  for  the  shares  the  subscription  may 
be  collected  by  calls  in  the  same  manner  as  statutory 
assessments  ;12  and  where  a  note  is  given  for  the  sub- 
scription it  is  better  practice  to  treat  the  note  as  addi- 
tional evidence  of  the  promise  to  pay  the  subscription 
price  and  not  as  payment,  and  for  the  corporation  to 
retain  the  certificate  until  the  note  is  paid.13  While 
the  subscriber  may  withdraw  from  the  subscription 
agreement  prior  to  incorporation,  subject  to  any  con- 


6  Beedy   v.    San   Mateo   Hotel   Co.,    27   Cal.   App.    653,    661. 

7  Gray    v.    Ellis,    164    Cal.    481,    487. 

8  Pasadena   Rapid   Transit  Co.   v.   Munson,   26   Cal.   App.    Dec. 

1072. 

9  San  Joaquin  Land  &  Water  Co.  v.  Beecher,   101  Cal.   70,  79. 

10  Marysville   etc.,   Co.   v.   Johnson,    93   Cal.   638,   546. 

109    Cal.    192. 

11  Horseshoe  Pier  etc.   Co.   v.   Sibley,   157  Cal.   442,   447. 

12  Los   Angeles   Athletic  Club   v.   Spiers,    166   Cal.    173. 

13  Ballou   v.   Avery,    175    Cal.    641. 


Subscription  Agreement  23 

tractual  liability  to  their  co-subscribers,  they  may  not 
be  released  from  their  subscriptions  after  incorporation 
except  by  unanimous  consent  of  their  co-subscribers, 
unless  the  subscriptions  are  obtained  by  fraud  or  mis- 
take.14 Subscribers  as  between  themselves  may  agree 
to  issue  the  subscription  shares  for  any  agreed  valuable 
consideration,16  but  may  not  issue  them  without  any 
consideration,16  or  merely  upon  the  agreement  of  the 
donee  to  sell  the  stock  and  turn  the  proceeds  over  to 
the  corporation,17  or  to  equalize  the  cost  of  the  stock 
to  the  subscribers  with  that  paid  by  later  purchasers.18 
Disclosed  conditional  subscriptions  are  valid19  but  un- 
desirable, as  they  leave  the  question  open  whether  the 
conditional  subscribers  are  entitled  to  join  in  organizing 
the  corporation.  Subscriptions  upon  condition  kept 
secret  from  co-subscribers,  such  as  that  the  subscription 
is  not  to  be  paid  except  from  dividends  on  the  shares, 
will  be  enforced  free  from  the  secret  condition.20  At 
the  suit  of  the  judgment  creditors  of  the  corporation 
the  subscribers  and  their  successors  in  ownership  of 
the  subscription  shares  will  be  held  liable  at  any  time 
in  the  future  to  pay  the  difference  between  the  real 
value  of  the  consideration  paid  to  the  corporation  for 
shares  and  the  par  value  of  the  shares,21  unless  the 
creditors  are  estopped  by  knowledge  of  the  real  consid- 
eration at  the  time  they  extended  the  credit  to  the 
corporation.22  To  impart  this  notice  a  certified  copy 
of  the  permit  of  the  Commissioner  of  Corporations  to 
issue  the  shares  should  be  recorded  in  the  office  of  the 
recorder  of  the  county  of  the  principal  place  of  busi- 
ness of  the  corporation.23  A  different  situation,  how- 

14  Silicia   Brick   Co.   v.   Winsor,   171    Cal.    18,    21. 

15  Garrettson  v.  Pacific  Crude  Oil  Co.,   146  Cal.   184. 

16  Lucey  Co.   v.   McMullen,   66   Cal.   Dec.    870. 

17  Cortelyou   v.    Imperial  Land  Co.,    156  Cal.    373. 

18  Kellerman   v.   Maier,    116   Cal.    416. 

19  Jefferson    v.    Hewitt,    103    Cal.    624; 

Tidewater   Sou.    Ry.   Co.   v.   Vance,    31   Cal.   App.    503. 

20  Quartz   &   Glass   Mfg.    Co.    v.    Joyce,    27   Cal.   App.    523. 

21  Herron   v.    Shaw,    166    Cal.    668; 
Hasson-  v.    Koeberle,   67   Cal.    Dec.    468. 

22  Harrison  v.   Armour,   169   Cal.    787. 

23  Corporate   Securities  Act,   Section   23; 
Statutes   1917,    page   684. 


24  Formation  and  Organisation 

ever,  arises  where,  after  organization,  unsubscribed 
shares  are  sold  at  less  than  par  but  at  their  full  market 
value.24  The  signing  of  the  name  of  a  fictitious  person 
to  any  subscription  agreement,  or  the  name  of  any  per- 
son under  an  understanding  that  the  subscription  is  not 
to  be  complied  with,  is  a  misdemeanor.25  The  sub- 
scription must  be  complete  before  the  articles  of  incor- 
poration are  filed,  as  thereafter  no  valid  subscriptions 
can  be  made  except  sales  first  authorized  by  the  Com- 
missioner of  Corporations.26 

OFFERS  TO  PURCHASE  AND  SALES  OF  SHARES. 

The  plan  for  financing  the  newly  organized  corpora- 
tion usually  takes  one  of  four  forms, — that  of  a  closed 
stock  corporation,  where  it  is  the  intention  of  the 
parties  to  keep  the  stock  in  a  few  hands;  that  of  a 
distributive  stock  corporation,  where  the  capital  secur- 
ities are  underwritten  by  a  financial  house  for  cash  at 
a  discount ;  where  the  shares  are  issued  for  property 
with  the  intention  on  the  part  of  the  purchasers  to 
resell  to  the  public;  and  where  the  capital  securities 
are  to  be  sold  directly  to  the  public  by  the  corporation 
for  cash.  In  any  case,  the  plan  should  be  sufficiently 
flexible  and  the  directors  named  for  the  first  year  or 
other  managing  committee  be  given  sufficient  authority 
to  adjust  the  plan  to  meet  the  requirements  of  the 
Commissioner  of  Corporations.  It  is  desirable  that  a 
form  balance  sheet  be  attached  to  the  offer,  setting  out 
the  capital  assets  and  liabilities  as  they  will  appear 
upon  acceptance  of  the  offer,  with  a  schedule  of  the 
distribution  of  the  capital  securities  among  the  joint 
purchasers.  This  will  enable  any  one  interested  to  see 
whether  the  working  capital  is  properly  balanced 
against  the  fixed  assets  and  what  relation  the  commis- 


24.     Lucey    v.    McMullen,    178    Cal.    425. 

O'Dea  v.   Hollywood   Cemetery  Assn.,   154   Cal.   53,   67. 

25  Penal   Code.   Section   557. 

26  Nannizzi   et   al.   v.    Caprile   et   al.,    30    Cal.    App.    Dec.    135; 
Corporate   Securities  Act,   Sections   3  and   25; 

Statutes   1917,  page   684. 


Offers  to  Purchase  and  Sales  of  Shares          25 

sion  or  discount  bears  to  the  exchange  values.  Where 
the  securities  are  to  find  their  way  into  the  hands  of 
the  public,  it  is  equally  important  that  a  statement  of 
the  plan  of  conducting  the  business  and  the  experience 
of  the  intended  managers  who  are  to  take  active  charge 
be  set  out.  Where  the  offer  is  to  purchase  securities 
in  part  for  cash  and  in  part  for  a  going  business  or 
undeveloped  property  or  intangible  rights,  it  should  be 
so  balanced  as  to  leave  the  preferred  stock  secure 
against  calls  by  creditors  and  assessments  by  the  cor- 
poration, the  mortgage  bonds  with  an  ample  margin 
of  underlying  security,  the  unsecured  debentures  ear- 
marked so  as  not  to  mislead  purchasers  unacquainted 
with  the  plan  of  organization,  the  owners  of  the  com- 
mon stock  in  control  of  the  board  of  directors  and  a 
sufficient  margin  of  profit  to  the  subscribers  of  the 
enterprise  and  the  underwriters  of  the  securities  to 
compensate  them  for  the  time  and  money  expended. 
If  any  of  the  original  subscribers  are  to  derive  any 
advantage  upon  the  offer  being  accepted  that  fact 
should  clearly  appear,  although  the  amount  of  their 
profit  need  not  be  stated.  Where  the  offer  made  to 
the  corporation  is  on  behalf  of  a  syndicate  or  other 
joint  adventurers  to  which  the  members  are  contributing 
various  forms  of  property,  there  should  be  a  state- 
ment that  the  valuations  of  properties  and  securities 
are  not  representations  of  fact  but  approximations  only 
to  assist  the  parties  in  prorating  the  risks  and  rights 
in  the  organization  and,  if  such  is  the  fact,  that  certain 
of  the  members  expect  to  realize  a  profit,  commission 
or  advantage  upon  the  acceptance  of  the  offer.  The 
offer  should  by  its  terms  remain  open  a  sufficient  time 
to  permit  of  action  by  the  Commissioner  of  Corpora- 
tions, be  made  subject  to  his  approval  and  state  in  clear 
language  that  its  conditinal  acceptance  and  the  applica- 
tion to  issue  stock  in  accordance  with  the  offer  shall 
not  constitute  the  purchasers  or  their  assigns  either 
subscribers  or  stockholders  until  the  board  of  direct- 
ors of  the  corporation  formally  accepts  the  offer  and 
makes  the  sale  after  the  permit  of  the  Commissioner 


26  Formation  and  Organisation 

has  been  issued.  If  there  is  any  ambiguity  as  to 
whether  or  not  these  contract  purchasers  are  subscrib- 
ers and  the  offer  involves  a  purchase  of  bonds,  con- 
siderable confusion  will  arise  as  to  whether  they  are 
included  among  the  subscribers  who  must  act  in 
authorizing  the  bond  issue  or  adopting  by-laws. 

If  the  preferred  stock  is  non-participating  in  the 
profits  beyond  the  secured  preference  the  takers  will 
frequently  wish  the  privilege  of  converting  it  into 
common,  which  option  will  be  exercised  by  them  if 
the  enterprise  proves  successful.  If  the  preferred 
stock  is  participating  the  takers  of  the  common  will 
desire  that  the  corporation  have  the  option  to  redeem 
the  prcferre'l  after  a  certain  number  of  years.  No 
difficulty  is  encountered  in  providing  for  the  conver- 
sion of  one  class  of  stock  into  another  or  the  payment 
of  a  bonus  upon  the  preferred  being  converted  into 
common,  provided  the  bonus  can  be  paid  out  of  profits 
arising  in  the  business.  The  redemption  of  stock  with 
either  cash,  property  or  bonds  usually  involves  a  re- 
duction of  the  capital  stock  considered  as  capital  paid 
in  and  may  or  may  not  require  a  corresponding  reduc- 
tion of  authorized  capital  stock.  Where  the  amount 
paid  on  redemption  of  the  capital  shares  does  not  ex- 
ceed the  amount  paid  in  for  it  and  the  authorized 
capital  stock  is  reduced  in  the  same  proportion,  no 
difficulty  is  encountered.  Where,  for  instance,  a  com- 
bination of  preferred  and  common  stock  is  issued  for 
property  worth  less  than  the  par  value  of  the  stock 
so  issued  and  by  the  contract  of  sale  the  preferred 
stock  is  to  be  redeemed  at  par  at  the  option  of  the 
holder,  upon  proceedings  regularly  taken  to  reduce  the 
capital  stock  it  might  happen  that  all  the  assets  would 
be  paid  out  on  reduction  by  one-half  of  the  issued 
capital  stock,  leaving  the  remaining  one-half  outstand- 
ing representing  no  assets  and  without  the  creditors 
having  been  paid.  The  right  to  provide  in  the  contract 
of  sale  for  a  repurchase  by  the  corporation  of  the  stock 
at  the  option  of  the  purchaser,  where  the  contract  does 
not  involve  original  subscription  stock  and  the  repur- 


Offers  to  Purchase  and  Sales  of  Shares          27 

chase  does  not  reduce  the  capital  assets  by  more  than 
the  sum  paid  in  for  such  stock,  nor  involve  the  rights 
of  creditors,  has  been  sustained;1  but  any  statement 
that  the  contract  for  the  sale  and  purchase  may  pio- 
vide  for  the  redemption  or  repurchase  of  shares  out  of 
capital  stock  paid  in  is  without  authority.  Where  the 
preferred  stock  has  a  preference  as  to  assets  under 
adequate  provision  in  the  articles  and  certificate,  the 
capital  stock  paid  in  may  be  reduced  by  a  correspond- 
ing reduction  of  authorized  capital  stock  without  pro- 
rating the  reduction  with  the  common  stock;  but  any 
reduction  of  issued  stock  below  the  existing  indebted- 
ness of  the  corporation  is  prohibited  and  any  reduction 
of  the  capital  paid  in  below  the  proportion  it  bears  to 
the  remaining  outstanding  capital  stock  should  be 
equally  invalid.  The  power  of  the  Commissioner  tQ 
permit  such  a  reduction  is  not  settled. 

By  reason  of  the  fact  that  we  have  no  form  of 
security  which  may  be  issued  to  represent  a  right  to 
management  and  to  share  in  the  profits  without  capital 
investment  nominally,  at  least,  equal  to  every  other 
share,  it  has  been  the  practice  in  the  past  to  issue  two 
classes  of  securities  for  a  single  consideration.  As  the 
trust  fund  liability  does  not  apply  to  bonds,  shares  of 
little  market  value  were  issued  at  par  and  bonds  se- 
cured by  all  the  assets  were  given  as  a  bonus.2  It  is 
to  the  credit  of  the  Commissioner  of  Corporations  that 
he  has  discouraged  this  proceeding  and  "has  endeav- 
ored as  a  matter  of  good  business  policy  to  limit  the 
issue  of  shares  to  an  amount  approximating  the  reason- 
able value  of  the  consideration  passing  to  the  com- 
pany."3 It  would  tend  to  truthfulness  and  simplicity  if 
shares  were  authorized  to  represent  voting  rights,  risk 
and  profits,  with  liability  to  creditors  and  without  cap- 
ital investment,  and  another  class  of  shares  were 
authorized  without  liability  to  creditors  when  paid  in 
at  time  of  issue  in  money  or  money's  worth  to  the 

1  Schulte  v.   Boulevard   Gardens  Land   Co.,   164   Cal.   464. 

2  McKee  v.   Title   Insurance  Co.,   159   Cal.   206,   218; 
Williamson    v.    Collins,    243    Fed.    835. 

3  Report   of   Commissioner   Bellows,    1918. 


28  Formation  and  Organisation 

amount  of  the  par  value.  Until  such  shares  are  author- 
ized, various  makeshifts  will  continue  to  be  employed. 
An  amendment  to  the  constitution  along  this  line  was 
defeated  in  1918.  The  desired  situation  may  be  ap- 
proximated by  issuing  certain  shares  of  stock  for  money 
or  money's  worth  equal  to  the  par  value  of  the  stock 
and  so  as  not  to  be  assessable  by  the  corporation,  and 
issuing  a  substantially  larger  number  of  shares  not 
fully  paid,  the  unpaid  balance  being  left  subject  to  call 
by  the  board  of  directors.  By  increasing  the  propor- 
tion the  partly  paid  stock  bears  to  the  fully  paid,  and 
decreasing  the  percentage  of  the  par  value  paid  in  on 
the  partly  paid  stock,  both  the  control  of  the 
business  and  the  risk  of  loss  will  be  increasingly 
shifted  to  the  owners  of  this  partly  paid  stock.  Gen- 
erally it  will  be  desirable  to  accentuate  the  distinction 
by  making  the  fully  paid  shares  preferred  stock,  but 
this  is  not  necessary.  Calls  should  be  made  on  the 
partly  paid  shares  until  fully  paid  before  any  assess- 
ments are  levied  on  the  fully  paid.4  Where  shares  are 
issued  as  fully  paid  for  property  of  less  value  than 
the  par  of  the  shares,  care  should  be  taken  to  see  that 
the  certificate  of  the  Commissioner  of  Corporations 
recites  the  fact  and  a  copy  should  then  be  recorded 
in  the  office  of  the  recorder  of  the  county  of  the  prin- 
cipal place  of  business  of  the  corporation  to  impart 
notice  to  creditors.5 

ARTICLES  OF  INCORPORATION. 

When  a  corporation  has  shares  of  stock  with  par 
value,  articles  of  incorporation  must  be  prepared,  set- 
ting forth  the  name  of  the  corporation,  the  purpose  for 
which  it  is  formed,  the  place  where  its  principal  busi- 
ness is  to  be  transacted,  the  term  for  which  it  is  to 
exist,  not  exceeding  fifty  years,  the  number  of  its  di- 
rectors which  shall  not  be  less  than  three,  the  names 

4  O'Dea   v.    Hollywood    Cemetery   Assn.,    154    Cal.    63,    65; 
Imperial  Land   etc.   Co.   v.    Oster,    34   Cal.   App.    776. 

5  Corporate    Securities    Act,    Section1    23; 
Statutes    1917,    page    685. 


Articles  of  Incorporation  29 

and  residences  of  those  who  are  appointed  for  the  first 
year,  the  amount  of  its  capital  stock  and  the  number  of 
shares  into  which  it  is  divided  and  the  par  value 
thereof,  the  amount  actually  subscribed  and  by  whom. 
Such  corporations  may,  by  their  articles,  provide  for 
the  classification  of  their  capital  stock  into  preferred 
and  common;  in  which  event  the  articles  must  contain 
a  statement  of  the  shares  of  stock  to  which  preference 
is  granted,  the  nature  and  extent  of  the  preferences 
granted  and,  except  ?s  to  the  matters  and  things  so 
stated,  no  distinction  shall  exist  between  the  classes 
of  stock  or  the  c\vners  thereof.  No  preference  is 
allowed  to  be  granted  nor  distinction  to  be  made  be- 
tween the  classes  of  stock  either  as  to  voting  power 
or  as  to  the  statutory  or  constitutional  liability  of  the 
holders  theerof  to  the  creditors  of  the  corporation,  nor 
any  difference  between  the  par  value  of  the  shares  of 
the  different  classes.1  Since  the  right  of  subscribers 
or  stockholders  to  take  at  par  their  proportionate  part 
of  any  new  issue  of  stock  is  not  settled  by  authority 
in  this  state  it  is  well  to  have  a  definite  provision  in 
the  articles  and  noted  on  the  certificate,  stating  the 
right  of  the  stockholders  either  to  participate  in  such 
new  issues  of  stock  or  the  power  of  the  board  of  direct- 
ors to  issue  and  sell  such  shares  of  stock  without  first 
offering  them  to  the  stockholders.  While  the  facts 
required  to  be  stated  in  the  articles  by  statute  and  the 
statute  constitute  the  charter  of  the  corporation,  it  is 
now  well  settled  that  the  stockholders  may  incorporate 
additional  provisions  in  the  articles  of  incorporation 
which  being  noted  on  the  certificate  will  form  a  part 
of  the  fundamental  contract  between  the  subscribers 
or  purchasers  and  their  successors. 

Where  a  corporation  is  organized  with  shares  of 
stock  without  par  value,  the  articles  of  incorporation 
must  be  prepared,  setting  forth  the  name,  the  purpose 
for  which  it  is  formed,  the  place  where  its  principal 
business  is  to  be  transacted,  the  term  for  which  it  is 

1       Civil  Code,  Section  390. 


30  Formation  and  Organization 

to  exist,  not  exceeding  fifty  years,  the  number  of  its 
directors  or  trustees  which  shall  not  be  less  than 
three,  and  the  names  and  residences  of  those  who  are 
appointed  for  the  first  year.  The  articles  shall  also  set 
forth  the  amount  of  capital  with  which  the  corporation 
will  carry  on  business,  the  number  of  shares  into 
which  it  is  divided  and  the  consideration  for  which 
its  shares  may  be  issued  or  sold.  No  such  corporation 
shall  begin  to  carry  on  business  or  incur  any  debts 
until  the  amount  of  the  capital  stated  in  its  articles  of 
incorporation  shall  have  been  fully  paid  in  money  or 
in  property  taken  at  its  actual  value.  Such  corporation 
may  thereafter  issue  and  sell  its  authorized  shares 
from  time  to  time  for  such  consideration  as  may  be 
prescribed  in  the  articles  of  incorporation,  and  any 
shares  sold  or  issued  for  such  consideration  shall  be 
deemed,  when  such  consideration  shall  have  been  paid 
or  delivered  to  the  corporation,  to  be  fully  paid.  If 
any  of  the  shares  be  preferred  stock,  the  articles  must 
state  the  amount  of  each  class  having  the  preference 
and  the  particular  character  of  such  preference,  and 
if  such  preferred  stock  or  any  part  thereof  shall  have  a 
preference  as  to  principal  the  par  value  of  each  share 
thereof,  which  shall  be  one  dollar  or  some  multiple 
thereof  not  exceeding  one  hundred  dollars ;  in  which 
event  the  amount  of  capital  with  which  the  corporation 
will  carry  on  business  shall  be  a  sum  equal  to  the 
product  obtained  by  multiplying  the  par  value  of  such 
preferred  shares  by  the  whole  number  of  shares  that 
may  be  issued  by  the  corporation.  It  is  provided  that 
no  distinction  shall  exist  between  any  shares  or  classes 
of  shares  either  as  to  voting  power  or  as  to  the  stat- 
utory or  constitutional  liability  thereof  to  the  creditors 
of  the  corporations,  and  each  share  of  stock  without 
nominal  or  par  value  shall  be  equal  in  every  respect 
to  every  other  share  authorized  to  be  issued,  subject 
only  to  the  preference  granted  to  the  preferred  stock, 
if  any,  as  stated  in  such  articles.2 

2  Statutes  1917,  page  1321. 


Articles  of  Incorporation  31 

The  name  chosen  for  a  business  corporation  ma)  not 
include  the  words  "trust"  or  "trustee"  unless  author- 
ized to  act  in  fiduciary  capacities3  and  should  be  re- 
served wtih  the  Secretary  of  State  prior  to  filing  the 
articles,  as  he  is  not  authorized  to  issue  any  certificate 
of  incorporation  to  any  corporation  whose  articles  set 
forth  the  name  of  any  corporation  theretofore  organ- 
ized in  this  state,  or  which  set  forth  a  name  so  closely 
resembling  the  name  of  such  other  corporation  as  will 
tend  to  deceive.4  Even  if  the  name  is  approved  by 
him  and  his  certificate  issued,  if  the  name  is  so  similar 
to  that  of  another  corporation  as  to  create  confusion 
and  enable  the  later  corporation  to  obtain  the  busi- 
ness of  the  prior  one,  an  injunction  will  issue  to  re- 
strain the  second  from  using  the  name  so  far  as  is 
necessary  to  protect  the  first  user  against  misrepresen- 
tation. This  is  an  application  of  the  same  rule  as  to 
an  individual  using  the  name  of  another  under  similar 
circumstances.5 

The  place  where  its  principal  business  is  to  be  trans- 
acted should  state  the  city  or  town  and  the  county  and 
state.  If  the  principal  place  of  business  is  outside  of 
an  incorporated  city  or  town,  some  smaller  geographical 
subdivision  than  the  county,  with  the  nearest  postoffice 
address,  should  be  given.  Under  a  former  statute  re- 
quiring the  city  or  town  and  county  to  be  stated,  the 
statement  of  the  county  only  was  held  insufficient.6 
The  due  incorporation  of  any  company  claiming  in  good 
faith  to  be  a  corporation  and  doing  business  as  such  is 
not  permitted  to  be  inquired  into  collaterally  in  any 
private  suit.7 

The  articles  of  incorporation  must  be  subscribed  by 
each  of  the  persons  named  therein  as  directors  for  the 
first  year  and  acknowledged  by  each  of  them  before 


3  Civil   Code,    Section    290%. 

4  Civil   Code,   Section   296. 

6     Dodge   Stationery   Co.   v.    Dodge,    145   Cal.   380; 
Hainque   v.    Cyclops    Iron   Works,    136   Cal.    351. 

6  Harris  v.  McGregor,  29  Cal.  125. 

7  Vallejo   etc.   R.   R.   Co.   v.   Reed   Orchard   Co.,   169   Cal.   560; 


32  Formation  and  Organization 

some  ofiktr  authoiized  to  take  and  certify  acknowl- 
edgements of  conveyances  of  real  property.8  The  or- 
iginal articles  of  incorporation  so  certified  and  ac- 
knowledged must  be  filed  in  the  office  of  the  County 
Clerk  of  the  county  named  as  that  in  which  the  prin- 
cipal business  of  the  company  is  to  be  transacted  and 
a  copy  thereof,  certified  by  the  County  Clerk,  should 
be  filed  with  the  Secretary  of  State,  who  is  thereupon 
required  to  issue  to  the  corporation  over  the  great  seal 
of  the  state  a  certificate  that  a  copy  of  the  articles 
containing  the  required  statement  of  facts  has  been 
filed  in  his  office,  and  therupon  the  persons  signing  the 
articles  and  their  associates  and  successors  become  a 
body  corporate. &  Should  articles  properly  executed  be 
filed  with  the  Clerk  of  the  wrong  county,  the  error  may 
be  corrected  by  special  proceedings  in  the  Superior 
Court  of  that  county.10  A  copy  of  any  articles  of 
incorporation  filed  in  pursuance  of  the  statute  and 
certified  by  the  Secretary  of  State  or  by  the  County 
Clerk  of  the  county  where  the  original  articles  have 
been  filed  is  prinia  facie  evidence  of  the  facts  therein 
stated.11 

GOVERNMENT  FEES  AND  CHARGES. 

The  original  Articles  of  Incorporation  are  filed  with 
the  County  Clerk  of  the  county  in  which  the  principal 
place  of  business  is  located,  for  the  filing  of  which  the 
County  Clerk  collects  a  fee  of  one  dollar  and  an  addi- 
tional fifty  cents  for  certifying  to  a  copy.1  This  cer- 
tified copy  is  then  filed  with  the  Secretary  of  State, 
who  being  furnished  additional  copies  for  that  purpose 
certifies  them  to  the  organizers  upon  payment  of  his 
fees  as  follows  :2 


8  Civil    Code,    Section    292. 

9  Civil   Code,   Section   296. 

10  Civil   Code,    Section    363. 

11  Civil  Code,   Section   297. 

1  Political   Code,    Sec.    4300a. 

2  Political   Code,    Sec.    409. 


Government  Fees  and  Charges  33 

For  comparing  and  recording  Articles  of  In- 
corporation   (per   folio)    $       .25 

For  issuing  Certificate  of  Incorporation 3.00 

For   issuing   two   certified   copies   of   Articles    of 

Incorporation  at  $2.00  each    4.00 

Filing  Articles  of  Incorporation,  when  authorized 
capital  stock  amounts  to: 

$      25,000  or  less    15.00 

75,000  or  less   25.00 

200,000  or  less   75.00 

1,000,000  or  less   100.00 

If  the  capital  stock  is  over  $1,000,000,  $100.00  and 
$50,00  additional  for  every  $500,000  or  fraction  thereof. 

At  the  same  time  the  incorporators  pay  to  the  Sec- 
retary of  State  the  license  tax,  or  the  proper  quarterly 
parts  thereof,  for  the  current  fiscal  year,  based  on  the 
authorized  capital  stock  of  the  corporation  as  follows  :3 

$        10,000  or  less  $      10.00 

20,000  or  less  15.00 

50,000  or  less  20.00 

100,000  or  less  25.00 

250,000  or  less 50.00 

500,000  or  less  75.00 

1,000,000  or  less  100.00 

3,000,000  or  less 200,00 

5,000,000  or  less  350.00 

7,000,000  or  less  500.00 

10,000,000  or  less  800.00 

Over    10,000,000 1,000.00 

When  the  capital  stock  of  any  corporation  has  no  par 
value  the  filing  fee  with  the  Secretary  is  determined 
by  the  total  capital  fixed  in  the  Articles,  and  the  license 
tax  is  one  hundred  dollars.  When  part  of  the  capital 
stock  has  a  par  value  and  a  part  has  no  par  value,  the 
tax  is  computed  upon  such  par  value  stock  in  accord- 


3  Statutes  1917,  page  373,  section  3. 


34  Formation  and  Organisation 

ance  with  the  above  schedule,  to  which  is  added  the 
sum  of  fifty  dollars.  Building  and  loan  companies  and 
associations  and  corporations  having  no  capital  stock 
but  organized  for  profit  are  required  to  pay  an  annual 
license  tax  of  ten  dollars.  Corporations  organized  and 
conducted  solely  and  exclusively  for  educational,  re- 
ligious, scientific  or  charitable  purposes,  corporations 
which  are  not  organized  or  conducted  for  profit,  and 
public  utility  corporations  taxed  under  Section  14  of 
Article  XIII  of  the  Constitution  are  exempt  from  pay- 
ment of  the  license  tax,  and  the  Secretary  of  State, 
the  State  Comptroller  and  members  of  the  State  Board 
of  Control  are  constituted  the  Corporation  License  Tax 
Exemption  Board  for  the  purpose  of  determining 
whether  a  particular  corporation  is  exempt  or  not.* 
Under  the  stamp  tax  provisions  of  the  War  Revenue 
Act  of  1918,  document  stamps  at  the  rate  of  five  cents 
for  each  one  hundred  dollars  of  capital  stock  issued 
are  required  to  be  affixed  to  the  stock  book,  and  at  the 
rate  of  two  cents  for  each  one  hundred  dollars  of  par 
value  of  stock  transferred.5  Upon  filing  the  applica- 
tion with  the  Commissioner  of  Corporations  for  a  per- 
mit to  issue  securities,  the  applicant  is  required  to  pay 
fees  based  on  the  par  value  or  face  value  of  the  secur- 
ities which  authority  is  asked  to  issue,  as  follows:  on 
$20,000  or  less,  $10;  for  the  next  $30,000,  one-twen- 
tieth of  one  per  cent,  or  .0005;  on  the  next  $50,000, 
one-twenty-fifth  of  one  per  cent,  or  .0002;  and  on  all 
applications  to  issue  above  $500,000,  one-one-hundredth 
of  one  per  cent,  or  .0001.  This  makes  the  sum 
of  $175.00  for  the  first  $1,000,000  of  securities,  if 
covered  by  a  single  application.6 

Estimated   expense   of   Incorporating   Company   with 
Capital  Stock: 


4  Statutes    1917,    page    373,    section    6. 

5  War   Revemie   Act   1918,   section    1107,    Schedule   A. 

6  Corporate    Securities    Act,    section    20;    Statutes    1917,    pagre 

693. 


Government  Fees  and  Charges 


35 


1 

If* 
pJL 

£T  2 

1»  c 
n 

*O  *t 

i 

*f 

SB  to' 

3 

i 

s 

en 

8 

CO 

§ 

t—  ' 

o 

8 

M 

O 

8 

8 

o 

8 

CO 

8 

H* 

8 

|i 

8 

8 

en 

8 

s 

8 

S 
8 

en 

8 

0 

§ 

CO 

8 

8 

II 

8 

8 
8 

o 

8 

S 
8 

en 

s 

8 

o 

8 

CO 

8 

g 

«r  o 
88 

O  1ft 

8 

8 

to 

8 

CO 

8 

en 

8 

en 

8 

o 

8 

CO 

8 

S 

5*0 

gc  o 
O)   O 

R 

CO 

en 

8 

to 
en 

8 

8 

8 

CO 

en 

8 

8 

to 

s 

8 

JTo 
$8 

8 

8 

CO 

8 

i 

8 

8 

o 

8 

CO 

8 

8 

II 

8 

8 
8 

8 
8 

8 

to 

en 

8 

8 

8 

o 

8 

to 

*8 

8 

ij 

8 

S 
8 

8 

i 

8 
8 

S 
8 

8 

to 

8 

8 

off 

8 

3 

8 

I 
8 

i 

S 
8 

8 
8 

S 
S 

CO 

8 

S 

if 

K 
8 

en 

8 

8 

i 

8 
8 

8 

S 
8 

to 

8 

S 

°^i 

si 

8 

8 
8 

CO 

s 

8 

8 

i 

en 

8 

1 

to 

8 

i 

s| 

8 

I 
8 

8 

en 

8 

8 

8 

8 
8 

0 

8 

CO 

8 

8 

I§ 

36  Formation  and  Organisation 

ORGANIZATION. 

Prior  to  the  Corporate  Securities  Act,  upon  the  cer- 
tificate of  incorporation  being  received  from  the  Sec- 
retary of  State,  a  meeting  of  the  subscribers  was 
called  which  ratified  the  acts  of  the  organizers,  con- 
firmed the  members  of  the  board  of  directors  named 
in  the  Articles  and  adopted  a  code  of  by-laws.  Under 
the  Corporate  Securities  Act  the  order  of  proceeding 
is  somewhat  different, — the  members  of  the  board  ap- 
pointed by  the  Articles  meet,  elect  a  president,  secre- 
tary and  treasurer  and  apply  to  the  Commissioner  of 
Corporations  for  authority  to  issue  the  subscribed 
shares.1  Nothing  is  said  as  to  whether  the  subscribers 
may  adopt  a  code  of  by-laws  before  their  subscriptions 
are  approved  by  the  Commissioner  of  Corporations, 
but  logically  they  should  take  no  action  until  his  author- 
ity to  issue  the  subscribed  shares  is  obtained.  Then 
they  should  adopt  a  code  of  by-laws  and  file  a  written 
consent  that  shares  may  be  sold  without  being  first 
offered  to  the  stibsci  ibers.  Whether  failure  to  adopt 
by-laws  within  the  month,  or  to  organize  within  the 
year  will  make  the  incorporators  liable  as  partners  is 
doubtful.2  The  directors  may  now  initiate  proceedings 
for  the  sale  of  shares  and  the  creation  of  a  bonded 
indebtedness.  In  doing  so  the  Board  should  direct 
that  an  inventory  and  appraisement  be  taken  of  the 
property  offered  to  the  company  for  stock.3 

No  company  under  the  jurisdiction  of  the  Commis- 
sioner of  Corporations  is  permitted  to  sell,  except  upon 
a  sale  for  delinquent  assessment,  offer  for  sale,  nego- 
tiate for  sale  or  take  for  security  a  subscription  of  its 
own  shares  until  it  shall  first  apply  for  and  secure 
from  the  Commissioner  of  Corporations  a  permit 


1  Corporate    Securities   Act,    Section    25; 
/Statutes    1917,    page    685. 

2  Williams  Co.   v.   Ah  Quin,   30  Cal.   App.   Dec.    531; 
But  see  Civil   Code,   Sections   301   and    358. 

3  Hasson    v.    Koeberle,    57    Cal.    Dec.    458. 


Organisation  37 

authorizing  it  so  to  do.4  This  application  is  required 
to  be  in  writing  and  verified  on  behalf  of  the  corpora- 
tion by  an  officer  thereof,  to  the  effect  that  the  state- 
ments in  the  application  are  true  of  affiant's  own 
knowledge,  except  as  to  matters  therein  stated  upon 
information  and  belief,  and  that  as  to  those  matters 
he  believes  it  to  be  true.  Such  application  should  set 
forth,  either  by  statement  or  exhibit, — 6 

The  names  and  addresses  of  each  of  its  officers  and 
directors,  showing  the  investment  of  each  in  the 
corporations,  and  their  experience  in  the  business; 

The  location  of  its  office; 

An  itemized  account  of  its  financial  condition  in  the 
form  of  a  profit  and  loss  account; 

The  amount  and  character  of  its  assets  and  liabilities 
in  the  form  of  a  balance  sheet,  with  explanatory 
notes ; 

A  detailed  statement  of  the  plan,  upon  which  it  pro- 
poses to  transact  business,  including  the  plan  for 
financing  and  management  and  items  of  the  specific 
uses  to  which  the  new  capital  is  to  be  put; 

A  copy  of  any  security  it  proposes  to  issue ; 

A  copy  of  any  contract  is  proposes  to  make  concerning 
any  such  security,  stating  the  net  consideration  in 
money  or  property  to  be  received  by  the  corpora- 
tion and  the  brokerage  to  be  received  by  the  cor- 
poration and  the  brokerage  or  other  compensation 
to  be  paid  on  the  transaction; 

A  copy  of  any  prospectus  or  advertisement  or  other 
description  of  such  securities  intended  for  publica- 
tion; 

An  inventory  and  appraisement  of  any  property  it  de- 
sires to  accept  in  payment  for  securities; 


Corporate    Securities    Act,    Section    3;    Statutes    1917,    page 

676. 

Namiizzi   et  al.  v.   Caprile  et  al.,   30   Cal.  App.   Dec.   136. 
Corporate    Securities    Act,    Section    6;    Statutes    1917,    page 

677. 
Regulations  of  Corporation   Commissioner. 


38  Formation  and  Organisation 

A  copy  of  all  minutes  of  any  proceedings  of  its  direct- 
ors   or    stockholders    relating    to    or    affecting   the 
issue  of  such  securities; 
A  copy  of  its  articles  of  incorporation;  and 
A  copy  of  its  by-laws  and  of  any  amendments  thereto. 

Where  securities  are  to  be  issued  for  patents,  a  copy 
of  the  file  wrapper  of  the  proceedings  in  the  patent 
office  should  be  attached,  together  with  references  to 
similar  patents.  Where  securities  are  to  be  issued  for 
mining  claims  on  government  land,  the  application 
should  be  accompanied  by  copies  of  all  instruments  in 
the  chain  of  title,  with  annual  proofs  of  labor.  If  the 
application  is  to  issue  securities  for  property  it  should 
appear  that  the  capital  assets  at  going-business  value 
are  equal  to  the  face  of  the  securities  representing  the 
total  of  loaned  capital  and  of  stock  having  a  preference 
as  to  principal.  The  appraisement  of  the  capital  assets 
at  liquidation  value  should  exceed  by  a  safe  margin 
the  face  value  of  all  securities  representing  loaned  cap- 
ital, and  the  business  should  show  a  net  average  income 
for  at  least  three  consecutive  years  sufficient  to  meet 
fixed  charges,  dividends  on  preferred  stock  and  a  net 
income  remaining  equal  to  a  similar  dividend  on  the 
common  stock.  An  historical  balance  sheet  will  present 
these  facts  in  most  abbreviated  form.  If  the  assets  back 
of  any  class  of  securities  fail  to  measure  up  to  these 
requirements,  the  Commissioner  may  properly  require 
that  the  particular  security  be  deposited  in  escrow  and 
transferred  only  through  his  office  until  the  conditions 
are  met.  If  there  is  no  desire  to  transfer  the  stock 
to  the  public  there  is  no  reason  why,  on  presenting  a 
formal  application  to  the  Commissioner,  authority  to 
issue  the  stock  or  other  securities  to  the  parties  con- 
cerned in  their  agreed  proportions  should  not  be  al- 
lowed, but  in  such  case,  without  further  showing,  some 
restriction  on  its  transfer  may  be  made  a  condition  of 
the  certificate.  In  the  main  the  Act  is  securing  to 
the  public  some  measure  of  the  protection  against  fraud 
which  stock  brokers  long  since  found  it  necessary  to 


Required   by  Statute  39 

secure  for  themselves  by  rules  for  listing  on  the  stock 
exchange  and  voting  trust  agreements  to  secure  stabil- 
ity of  management.  Where  the  corporation  is  organ- 
ized with  shares  having  a  par  value  no  particular 
amount  of  capital  need  be  paid  in  before  the  corpor- 
ation begins  doing  business,  but  where  organized  with 
shares  without  par  value  the  stated  amount  of  capital 
must  be  first  paid  in. 


BY-LAWS 


REQUIRED  BY  STATUTE. 

Every  corporation  is  required  within  one  month  after 
filing  its  articles  of  incorporation  to  adopt  a  code  of 
by-laws  for  its  government  not  inconsistent  with  the 
constitution  and  the  laws  of  the  state.1  No  penalty 
is  prescribed  for  failure  to  do  so,  provided  the  corpora- 
tion is  organized  within  the  year.2  It  is  at  least  doubt- 
ful whether  the  subscribers  have  authority  to  adopt  a 
code  of  by-laws  before  the  Commissioner  of  Corpora- 
tions has  authorized  their  shares  to  be  issued  in  accord- 
ance with  the  subscriptions.3  However,  if  the  by-laws 
had  been  signed  by  all  the  subscribers  prior  to  their 
shares  being  issued  and  afterwards  certified  by  a  ma- 
jority of  the  board  of  directors,  they  will  be  held 
binding  upon  grounds  of  estoppel.4  By-laws  must  not 
be  inconsistent  with  the  constitution  and  the  laws  of 
the  state;5  nor  with  its  charter  construed  as  the  pro- 
visions in  the  articles  of  incorporation  required  to  be 
inserted  by  law.6  Thus,  the  by-laws  must  not  create 
preferences  between  stockholders,7  nor  change  the 

1  Civil   Code,   Section   301. 

2  Civil    Code,    Section    358. 

3  Corporate    Securities   Act,    Section-   25; 
Statutes   1917,   page   685. 

4  Vercoutere   v.   Golden   State   Land   Co.,   116   Cal.    415. 
6     Civil   Code,    Section    301. 

6  Peoples  Home  Sav.   Bank  v.   Sadler,   1   Cal.   App.   189. 

7  Civil   Code,    Section   290. 


40  By-Laws 

name,8  nor  the  principal  place  of  business,9  nor  enlarge 
the  scope  of  its  business,  nor  the  purposes  of  its  or- 
ganization.10 

ADOPTION  AND  SCOPE. 

The  assent  of  stockholders  representing  a  majority 
of  the  subscribed  stock  at  a  meeting  called  for  that 
purpose  by  order  of  the  acting  president  upon  two 
weeks'  notice  by  advertisement  in  some  newspaper 
published  in  the  county  in  which  the  principal  place 
of  business  of  the  corporation  is  located;  or  if  none  is 
published  therein  then  in  a  newspaper  published  in  an 
adjoining  county,  is  sufficient  for  the  adoption  of  the 
original  code  of  by-laws.1  The  general  rule  that  a 
majority  of  a  quorum  may  act  is  not  applicable  here. 
The  by-laws,  however,  may  be  adopted  by  the  written 
assent  of  the  holders  of  two-thirds  of  the  stock.2  How- 
ever adopted,  no  by-laws  can  be  enforced  against  any 
person  other  than  the  corporation  not  having  actual 
notice  thereof  until  copied  in  a  legible  hand  in  the 
book  of  by-laws  kept  at  the  office  of  the  corporation.3 
A  certificate  by  a  majority  of  the  directors  and  the 
secretary  of  the  corporation  required  by  the  code4  is 
not  made  a  condition  of  the  by-laws  being  notice  to 
stockholders.  There  is  no  power  to  delegate  to  the 
board  of  directors  authority  to  adopt  the  original 
code  of  by-laws,  but  the  power  to  amend  the  by-laws 
may  be  so  delegated  by  the  holders  of  two-thirds  of 
the  subscribed  stock.5  Old  by-laws  not  mentioned  in 
amended  by-laws  are  not  continued  in  force.6 

It  is  regarded  as  elementary  law  that  corporations 
have  power  to  enact  by-laws  for  their  internal  govern- 


8  Code    of  Civil   Procedure,    Sections    1275    et.    seq. 

9  Civil  Code,   Section   321a. 

10  Constitution,   Article  VII,   Section   9. 

1  Civil  Code,   Section   301. 

2  Civil  Code,   Section   301. 

3  Civil    Code,    Section    304. 

4  Civil   Code,    Section    304. 

5  Civil    Code,    Section    304. 

6  Murphy  v.  Pacific  Bank.  130  Cal.   642. 


Enforcement  and  Amendment  41 

ment,  determining  the  rights  and  regulating  the  duties 
of  the  members  and  providing  for  the  unforseen  details 
which  may  arise  in  the  business.1  The  term  is  properly 
confined  to  rules  regulating  the  rights  and  duties  of  the 
stockholders  between  themselves  and  between  the  stock- 
holders and  the  corporation,2  in  the  conduct  of  its  in- 
ternal affairs.  By-laws  do  not  by  themselves  constitute 
a  contract  between  stockholders,3  but  by  reference  they 
may  form  part  of  a  contract4  which  will  be  binding 
upon  purchasers  of  stock  with  notice,  and  this  notice 
may  be  given  by  a  notation  on  the  certificate.5  The 
authority  to  enact  by-laws  is  an  inherent  right  in  the 
absence  of  positive  legislation  restricting  it,  and  the 
enumeration,  in  Section  303  of  the  Civil  Code,  of  cer- 
tain matters  which  may  be  provided  for  in  the  by-laws 
has  not  limited  the  authority  of  the  corporation  to  make 
by-laws  for  the  management  of  its  property,  the  regu- 
lation of  its  affairs  and  the  transfer  of  its  stock,  as 
authorized  by  Section  354  of  the  Civil  Code.6  Where 
certificates  of  stock  are  to  be  issued  before  the  stock 
is  full)'  paid  provision  for  such  partly  paid  stock 
should  be  made  in  the  by-laws.7  It  is  well  to  pro- 
vide in  the  by-laws  the  form  of  certificate  to  be  issued, 
although  this  may  be  left  to  a  resolution  of  the  board 
of  directors. 

ENFORCEMENT  AND  AMENDMENT. 

The  by-laws  may  be  repealed  or  amended  or  new 
by-laws  may  be  adopted  at  the  annual  meeting  ot  the 
stockholders,  or  at  any  other  meeting  of  the  stock- 
holders called  for  that  purpose  by  the  board  of  direct- 
ors, in  either  of  which  events  an  affirmative  vote  repre- 
senting two-thirds  of  the  subscribed  stock  is  necessary 


1  Provident   etc.   Assn.   v.    Davis,    143   Cal.    257. 

2  Chewey  v.   Canfleld,   168   Cal.   348. 

3  Cheney  v.   Canfield,   158   Cal.   348. 

4.  Riverside   Land   Co.   v.    Jarvis,    174    Cal.    325. 

5  Jennings   v.    Bank    of   California,    79    Cal.    323. 

6  Peoples   Home   Savings   Bank   v.   Sadler,    1   Cal.   App.    195. 
Bornstein    v.    District    Grand   Lodge,    2    Cal.   App.    627. 

7  Civil   Code,    Section   323. 


42  By-Laws 

or  the  written  assent  of  the  holders  of  two-thirds  of 
the  subscribed  stock  is  sufficient.  The  amendments  can- 
not be  enforced  until  copied  or  the  repeal  stated,  with 
the  date  thereof,  in  the  manner  required  for  the  orig- 
inal by-laws.  The  power  to  repeal  and  amend  by-laws 
and  adopt  new  by-laws  may  be  delegated  to  the  board 
of  directors,  but  the  power  once  delegated  may  be 
revoked  only  by  the  affirmative  vote  of  two-thirds  of 
the  stock  at  a  regular  meeting  of  the  stockholders.1 
Attention  is  called  to  the  use  of  the  words  "annual 
meetings"  for  the  adoption  of  by-laws,  and  the  use 
of  the  words  "regular  meetings"  for  the  revocation  of 
the  authority  delegated  to  the  board  of  directors,  so 
that  the  authority  cnce  delegated  to  the  board  cannot 
be  recalled,  either  by  amendment  in  writing  signed  by 
the  holders  of  two-thirds  of  the  stock  or  by  vote  at  a 
special  meeting.  Where  authority  is  given  to  the 
directors  to  alter  or  amend  the  by-laws  or  to  adopt 
new  by-laws,  it  should  be  limited  so  as  to  prevent  thtir 
altering  or  annulling  a  by-law  imposing  a  valid  lim- 
itation on  the  mode  of  exercising  their  powers  or  pres- 
cribing the  manner  of  transacting  business,  or  pres- 
cribing the  duties  of  the  board  of  directors.  Viola- 
tion of  the  by-laws  may  be  penalized  not  to  exceed  in 
any  case  one  hundred  dollars  for  any  one  offense. 

STOCK  AND  TRANSFER  BOOKS. 

The  stock  and  transfer  books  of  the  corporation 
should  be  kept  at  the  office  of  the  company  which 
should  be  fixed  by  a  provision  in  the  by-laws1  at  a 
street  number  at  the  principal  place  of  business  stated 
in  the  articles  of  incorporation2  or  certificate  chang- 
ing the  principal  place  of  business  regularly  certified 
and  filed.3  In  the  stock  and  transfer  book  must  be  kept 
a  record  of  all  stock  issued,  the  names  of  the  stock- 

1  Civil    Code,    304. 

2  Civil  Code,   Section    303. 

1  Constitution,  Article  XII,   Section   14. 

2  Civil   Code,    Section    290,    subd.    3; 
Chapman   v.   Doray,   89   Cal.   64. 

3  Civil    Code,    Section    321a. 


Stock   and   Transfer  Books  43 

holders  alphabetically  arranged,  the  installments  paid 
and  unpaid,  the  assessments  levied  and  paid  or  un- 
paid, a  statement  of  every  alienation  sale  or  transfer  of 
stock  made,  the  date  thereof,  by  whom  and  to  whom.4 
The  names  and  amounts  of  subscriptions  to  capital 
stock  made  to  the  corporation  should  be  identified  on 
the  stock  and  transfer  book  so  as  to  dinstinguish  them 
from  sales  and  transfer  to  subsequent  purchasers,  as 
the  identity  of  shares  is  not  lost  by  transfer  or  splitt- 
ing up  into  different  certificates  or  combining  differ- 
ent shares  of  different  issues  under  a  single  certificate.5 
Whether  the  purchaser  of  one  issue  may  be  required 
to  take  shares  of  a  different  issue  is  at  least  doubtful.6 
Provision  should  also  be  made  on  the  stock  and  trans- 
fer book  for  noting  the  rights  of  non-stockholders  in 
the  shares,  as  a  pledgee  has  a  right  to  have  the  fact 
of  his  pledge  noted  on  the  stock  books,7  and  where 
the  corporation  has  notice  that  a  stockholder  holds  his 
stock  as  trustee  for  another  it  should  refuse  to  regis- 
ter a  transfer  until  it  is  satisfied  that  the  trustee  has 
power  to  make  the  transfer  ;8  but  the  mere  fact  that 
the  certificate  is  issued  in  the  name  of  the  ostensible 
owner  followed  by  the  word  "trustee"  is  not  notice 
of  the  rights  of  third  parties.9  Possession  of  a  certi- 
ficate by  one  not  named  therein  is  no  evidence  of  own- 
ership,10 but  the  owner  may  be  estopped  where  he 
endorses  the  certificates  in  blank  and  places  them  in 
the  possession  of  a  third  party  who  pledges  them 
without  authority,11  and  the  corporation  must  transfer 
shares  even  though  they  are  subject  to  attachment 

4  Constitution,    Article   XII,    Section    14; 
Civil    Code,    Section    378. 

5  Ramage    v.    Gould,    176    Cal.    746. 

6  Bell  v.   Bank   of  California,   153   Cal.   239; 
Bank    v.    Wickersham,    99    Cal.    655,    661. 

7  American    Trust    &    Banking    Co.     /.    Union    Security    Co., 

29   Cal.   App.   Dec.  729. 

8  MacDermot   v.    Hayes,    175   Cal.    95; 

Young  v.   New   Standard   etc.   Co.,    148   Cal.    310. 

9  Fletcher    v.    Kidder,    163    Cal.    769; 

Northwestern    Portland    Cement    Co.    v.    Atlantic    Portland 
Cement  Co.,   174   Cal.    308. 

10  Nicholls  v.   Reid,   109   Cal.    632. 

11  Fowles  v.  National  Bank   of  California,   167  Cal.   653. 


44  By-Laws 

by  levy  of  a  garnishment  on  the  corporation12  or 
where  assessments  have  been  levied  and  not  paid.13 
The  by-laws  should  provide  how  the  secretary  should 
proceed  upon  a  demand  for  a  transfer  and  the  issue 
of  a  certificate,  as  he  is  penalized  in  the  sum  of  four 
hundred  dollars  if  he  refuses  to  make  the  transfer  and 
issue  the  certificate14  and  liable  if  he  issues  a  false 
certificate,15  and  the  corporation  is  liable  for  the  value 
of  the  shares  in  conversion.16  The  corporation  is  en- 
titled to  a  reasonable  time  within  which  to  make  an 
independent  investigation  or  institute  an  action  for  in- 
terpleader where  there  are  rival  claims.17  If  the  trans- 
feree declines  to  accept  a  certificate  with  a  notation 
showing  all  claims  of  which  the  corporation  has  notice 
against  the  shares  represented  by  the  new  certificate, 
the  secretary  should  not  decline  to  issue  a  clean  certi- 
ficate but  should  report  the  matter  to  the  executive  of- 
ficers and  the  board  of  directors  for  instruction,  the 
right  to  make  the  notation  on  the  certificate  in  such 
cases  being  unsettled.18  Where  the  shares  of  stock  are 
owned  by  parties  residing  out  of  the  state,  the  presi- 
dent and  secretary  or  board  of  directors  may  require 
satisfactory  evidence  that  the  non-resident  owner  was 
alive  at  the  date  of  the  transfer.19  Shares  of  a  married 
woman  may  be  transferred  by  her  without  the  consent 
of  her  husband  and  in  the  same  manner  as  if  she  \vere 
unmarried.20  Within  these  limitations  the  corporation 
has  power  to  make  by-laws  for  the  transfer  ot  its 
stock.21  Under  this  provision  it  is  competent  for  the 
company  to  protect  itself  against  imposition  or  acci- 
dent.22 The  corporation  will  be  held  to  have  waived 
the  provision  of  the  by-laws  restricting  transfer  where 


12  Ramage    v.    Gould,    176    Cal.    746. 

13  Craig   v.    Hesperia   Land    &   Water   Co.,    113    Cal.    7. 

14  Civil    Code,    Section    324. 

15  Civil    Code,    Section    316. 

16  Ralston    v.    Bank    of    California,    112    Cal.    208,    213. 

17  Spangenberg-    v.    Nesbitt,    22    Cal.    App.    274. 
19  Ramage   v.    Goul,    176    Cal.    746. 

19  Civil    Code,    Section    326. 

20  Civil    Code,    Section    326. 

21  Civil   Code,   Section   364,   subd.   6. 

22  Weston   v.   Bear   River   etc.   Co.,   6   Cal.    189. 


Stock   and   Transfer  Books  45 

it  transfers  stock  into  the  name  of  the  transferee  with- 
out requiring  a  compliance  with  the  restrictive  provis> 
ions  of  the  by-laws.23 

Any  corporation  organized  in  this  state  for  the  pur- 
pose of  mining  or  carrying  on  mining  operations  is 
authorized  to  establish  and  maintain  agencies  in  other 
states  of  the  United  States  for  the  transfer  and  is- 
suance of  their  stock  in  accordance  with  the  provisions 
of  its  by-laws,24  but  it  is  probable  that  this  section  is 
unconstitutional  as  special  legislation,  as  there  is  no 
more  apparent  reason  why  corporations  organized  for 
the  purpose  of  mining  should  be  permitted  to  have 
transfer  agencies  outside  of  the  state  than  any  other 
corporations,  and  particularly  as  the  authority  is  not 
limited  to  those  engaged  in  the  business  of  mining.25 
Irrigation  and  domestic  water  companies  may  make 
their  shares  appurtenant  to  land  by  recording  a  certi- 
fied copy  of  a  by-law  so  providing.26  Co-operative 
companies  may  authorize  a  division  of  profits  among 
non-stockholders.27 

The  board  of  directors  should  be  authorized  in  its 
discretion  to  appoint  a  transfer  agent  and  registrar 
of  transfers,  and  in  which  event  to  require  that  all 
stock  certificates  thereafter  issued  bear  the  signature 
of  such  appointees.  Although  the  constitution  and 
civil  code  both  require  that  corporations  keep  a  stock 
and  transfer  book,  the  usual  form  of  keeping  the  stock 
transfer  records  with  the  stub  of  the  certificate  as  the 
book  of  original  entry,  with  a  journal  and  ledger,  is 
not  a  true  transfer  book,  which  requires  that  the  at- 
torney in  fact  of  the  transferror  shall  exercise  his 
power  by  making  a  transfer  over  his  own  signature  as 
attorney  in  fact  on  the  transfer  book.  The  course 
properly  followed  is  for  the  secretary  or  assistant  sec- 
retary actually  making  the  entry  to  fill  in  his  name  as 
the  attorney  in  fact  of  the  transferror  before  making 


23  Underbill   v.   Sairta   Barbara   etc.   Co.,   93    Cal.    300. 

24  Civil    Code,    Section    587. 

25  Krause   v.    Durbrow,    127    Cal.    681. 

26  Civil   Code,   Section    324. 

27  Civil   Code,    Section   653a. 


46  By-Laws 

the  transfer  and  then  make  the  assignment  on  the 
transfer  book  in  the  name  of  the  transferred.  Assign- 
ments in  blank  are  sufficient  to  pass  the  title  as  between 
the  parties.28  No  transfer  of  stock  standing  in  the 
name  of  a  decedent  or  in  trust  for  a  decedent  should 
be  made  without  written  consent  of  the  State  Con- 
troller.29 


RECORDS  AND  INSPECTION. 

All  corporations  for  profit  are  required  to  keep  a  rec- 
ord of  all  their  business  transactions,  a  journal  of  all 
meeting  of  their  directors,  members  or  stockholders, 
with  the  time  and  place  of  holding  the  same,  whether 
regular  or  special,  and  if  special  its  object,  how  author- 
ized, and  the  notice  thereof  given.  The  record  must 
embrace  every  act  done  or  ordered  to  be  done,  who 
were  present  and  who  were  absent,  and  if  requested 
by  any  member,  director  or  stockholder  the  time 
shall  be  noted  when  any  member  entered  the  meeting  or 
obtained  leave  of  absence  therefrom,  and  upon  a  similar 
request  the  ayes  and  noes  must  be  taken  on  any  propo- 
sition and  the  record  taken  thereof.  Upon  a  similar 
request  the  protest  of  any  member,  director  or  stock- 
holder to  any  action  or  proposed  action  must  be  en- 
tered in  full.1  If  for  any  reason  there  is  not  present 
a  majority  of  the  subscribed  stock  or  no  election  had 
at  any  regular  or  called  meeting  of  the  stockholders 
and  it  adjourned  from  day  to  day  or  from  time  to 
time,  the  fact  of  such  adjournment  and  the  reasons 
therefor  should  be  recorded  in  the  journal  of  proceed- 
ings of  the  board  of  directors.2  Corporations  for  profit 
must  keep  all  such  other  records  as  the  by-laws  pres- 
cribe.3 It  is  only  the  records  of  the  corporation  re- 
quired to  be  kept  that  are  evidence,  and  this  record  is 


28  Ashton   v.   Zeila  Mining  Co.,   134   Cal.    410. 

29  Inheritance   Tax   Act,    Sec.    13.    Stat.    1917,    p.    893. 

1  Civil   Code,   Section    377. 

2  Civil   Code,    Section    312. 

3  Civil   Code,    Section   378. 


Records  and  Inspection  47 

only  prima  facie  evidence  as  between  the  members  of 
the  corporation.4  Since  the  president  and  secretary  are 
required  to  furnish  under  oath  a  financial  statement 
upon  the  written  request  of  not  less  than  ten  per  cent 
of  the  stockholders  presented  not  less  than  two  weeks 
prior  to  the  time  of  the  annual  election  of  the  directors, 
the  by-laws  should  require  that  the  financial  books  of 
the  corporation  should  be  kept  in  such  manner  as  to 
have  the  facts  required  readily  available.  Such  state- 
ment must  show  the  authorized  capital  stock,  the 
amount  of  capital  stock  subscribed,  the  amount  of  cap- 
ital actually  paid  in,  the  assets,  surplus  and  undivided 
profits,  the  amount  paid  to  employees,  the  names  and 
addresses  of  all  officers  and  directors  of  the  corpora- 
tion, the  amount  of  mortgages,  bonded  or  other  in- 
debtedness, and  the  amount  of  the  last  annual,  semi- 
annual or  quarterly  dividend,  and  a  general  summary 
of  the  business  transacted  by  the  corporation  since  the 
last  preceding  annual  meeting.5  The  books  required 
to  be  kept  by  the  constitution  must  be  open  for  in- 
spection by  every  person  having  an  interest  therein  and 
by  legislative  committees.6  The  stock  and  transfer 
books  required  to  be  kept  by  the  Civil  Code  must  be 
open  to  the  inspection  of  any  officers,  bona  fide  stock- 
holders, member  or  creditor  of  the  corporation.7  One 
holding  a  single  share  of  stock  duly  registered  in  his 
name  on  the  books  of  the  corporation  but  in  fact  held 
in  trust  for  another  is  liable  to  pay  assessments  and 
to  creditors,  and  for  that  reason  would  seem  to  have 
an  interest  in  the  corporation,8  but  he  may  not  be  a 
bona  fide  stockholder.  The  records  of  the  business 
transactions  and  journal  of  the  meetings  of  directors 
and  stockholders  are  open  to  the  inspection  of  any  leg- 
islative committee,  board,  commission  or  officer  of  the 
state  of  California  whose  duty  it  is  to  examine  and 


4  Fletcher    v.    Kidder,    163    Cal.    771. 

5  Civil    Code,    Section    302a. 

6  Constitution,    Article    XII.    771. 

7  Civil   Code,    Section   378. 

8  Civil    Code,    Section    377. 


48  By-Laws 

inspect  the  same,  and  of  any  director  or  bona  fide 
stockholder  thereof;  provided,  however,  that  the  board 
of  directors  may  by  unanimous  vote  deny  such  examin- 
ation and  inspection  to  a  stockholder  who  demands  the 
same  with  intent  to  use  to  the  injury  of  the  corpora- 
tion the  information  to  be  acquired  thereby.9  Evi- 
dently such  a  one  puts  himself  out  of  the  class  of  bona 
fide  stockholders  as  contemplated  by  the  statute.  This 
last  provision  was  enacted  in  1917  without  repealing 
the  provision  of  the  Penal  Code  in  force  since  1872 
that  "every  officer  or  agent  of  the  corporation  having 
or  keeping  an  office  in  this  state,  who  has  in  his  cus- 
tody or  control  any  book,  paper  or  document  of  such 
corporation  and  who  refuses  to  give  a  stockholder 
lawfully  demanding  during  office  hours  to  inspect  or 
take  a  copy  of  the  same  or  any  part  thereof  reasonable 
opportunity  so  to  do,  is  guilty  of  a  misdemeanor".10 
The  Attorney-General  or  District  Attorney,  whenever 
and  as  often  as  required  by  the  Governor,  may  examine 
the  books,  papers  and  documents  belonging  to  any  cor- 
poration or  appertaining  to  its  affairs  and  condition.11 
The  legislature  or  either  branch  thereof  may  examine 
the  safes,  books,  papers  and  documents  belonging  to 
any  corporation  or  appertaining  to  its  affairs  and  con- 
dition and  compel  the  production  of  all  keys,  books, 
papers  and  documents  by  summary  process  to  be  issued 
on  application  to  any  court  or  judge  thereof,  under 
such  rules  and  regulations  as  the  court  may  prescribe.12 
The  Commissioner  of  Corporations  has  the  right  of 
inspection  and  may  require  the  attendance  of  witnesses 
and  the  production  of  books  and  papers  of  any  corpor- 
ation authorized  by  him  to  issue  securities.13  The  State 
Controller  and  Inheritance  Tax  Attorneys  have  the  right 


9     Civil    Code,    Section    377. 

10  Penal   Code,    Section-   566. 

11  Civil    Code,    Section    382. 

12  Civil   Code,    Sect     ion    383. 

13  Corporate    Securities   Act,    Section    17; 
Statutes   1917,   page   681. 


Stockholders  Meetings  49 

of  inspection  but  information  obtained  by  them  must 
be  held  as  confidential.14 

STOCKHOLDERS  MEETINGS. 

The  annual  meeting  of  the  stockholders  should  be 
held  at  the  office  of  the  corporation  at  its  principal 
place  of  business  as  fixed  in  the  articles  of  incorpora- 
tion1 or  certificate  changing  the  principal  place  of 
business,2  and  the  by-laws  should  designate  the  street 
number  of  such  office  and  the  date  and  hour  of  the 
meeting,  the  designation  of  the  day  and  place  being 
insufficient.3  If  the  by-laws  do  not  prescribe  the  time 
of  the  annual  election  it  is  fixed  by  statute  for  the  first 
Monday  of  June  of  each  year.4  The  by-laws  may 
provide  when  the  election  may  be  held  in  the  contin- 
gency that  it  does  not  take  place  on  the  day  appoint- 
ed.5 Whether  the  by-laws  may  dispense  with  notice 
by  publication  of  the  time  and  place  of  the  annual 
meeting  for  the  election  of  directors,6  or  whether  notice 
of  such  meeting  must  be  given  by  order  of  the  acting 
president  on  two  weeks  notice  by  advertisement  in 
some  newspaper  published  r.i  the  county  in  which  the 
principal  place  of  business  of  the  corporation  is  locat- 
ed, or  if  none  is  published  then  an  a  newspaper  pub- 
lished in  an  adjoining  county,  is  open  to  dispute.7  In 
a  recent  opinion,  Division  One  of  the  District  Court  of 
Appeal  for  the  First  District  stated  that  an  election  of 
directors  at  an  annual  meeting  of  the  stockholders  of 
a  corporation  was  illegal  and  void  where  the  meeting 
was  held  without  notice  by  advertisement  as  provided 
by  Section  301  of  the  Civil  Code,  notwithstanding  the 
by-laws  of  the  corporation  expressly  dispensed  with 

14     Inheritance   Tax    Act,    Sec.    12,    Stat.    1917,    p.    892. 

1  Civil  Code,   Section   90,   subd.   3. 

2  Civil   Code,    Section    321a. 

3  San  Buenaventura  etc.   Co.  v.  Vassault,   60  Cal.   634. 

4  Civil   Code,    Section    302. 

6     Civil   Code,   Section   303,   subd.    1; 
Civil    Code,    Section    314; 
Saline   Valley    Salt.    Co.    v.    White,    177   Cal.    343. 

6  Civil   Code,    Section   303,   eubd.   1. 

7  Civil   Code,   Section   310;   See   also,    Section   302. 


50  By-Laws 

the  giving  of  notice  in  that  manner.8  In  the  case  re- 
ferred to  this  opinion  was  dicta,  as  the  by-laws  pro- 
vided the  nay  of  the  month  of  each  year  on  which 
the  meeting  should  be  held  for  the  election  of  direct- 
ors without  specifying  the  hour,  and  also  provided 
that  no  notice  of  the  annual  meeting  need  be  given. 
The  question  has  been  raised  in  the  Supreme  Court 
by  the  record  in  at  least  three  cases,  but  not  passed 
upon.  In  two,  the  court  apparently  considered  a  notice 
by  mail  as  required  by  the  by-laws  to  be  sufficient.  9 
In  the  other,  the  by-laws  required  publication  for  ten 
days  instead  of  two  weeks,  but  the  meeting  was  held 
invalid  on  other  grounds.10  In  this  state  of  the  law 
it  is  advisable  to  have  the  by-laws  require  notice  by 
advertisement  in  a  newspaper  for  at  least  two  weeks 
as  provided  by  the  statute11  in  the  absence  of  a  by-law 
on  the  subject.  Notice  may  be  waived  by  all  the 
stockholders,  but  such  waiver  must  be  by  written  con- 
sent on  the  records  of  the  meeting  or  by  waiver  in 
writing  theretofore  signed,  presented  at  the  meeting 
and  made  a  part  of  the  records,  and  the  waiver  can- 
ont  be  made  by  ratification  thereafter,  although  indiv- 
idual stockholders  may  be  estopped  by  participating 
in  the  meeting  but  will  not  be  by  mere  attendance,12  even 
where  the  meeting  is  held  outside  of  the  state.  13 
The  by-laws  may  dispense  with  notice  of  regular  meet- 
ings except  the  annual  meetings  for  the  election  of 
directors,14  but  it  is  unusual  to  have  any  other  regular 
meetings.  At  a  regular  meeting  the  power  of  the 
directors  to  amend  the  by-laws  may  be  revoked  if 
occasion  requires.15 

In  view  of  the  fact  that  the  transaction  of  the  busi- 


8  Guaranty   Loan   Co.    v.    Fontanel.    29    Cal.    App.    Dec.    657. 

9  Pennington   v.  Penwington  Sons,   170   Cal.   114; 
•saline   Valley   Salt    Co.    v.    White,    177    Cal.    341,    344. 

10  Dolbear    v.    Wilkinson,    172    Cal.    366. 

11  iCivil    Code,    Sections    301,    303. 

12  Civil   Code,    Section   317; 

Dolbear   v.   Wilkinson,    172   Cal.    366. 

13  (Ellsworth   v.   Natiowal   etc.   Builders,    33    Cal.   App.    1,    2. 

14  Civil    Code,    Section    303.    subd.    1. 

15  Civil    Code,    Section    304. 


Stockholders  Meetings  51 

ness  of  the  corporation  with  third  persons  is  lodged 
in  the  board  of  directors,1  that  the  notice  and  manner 
of  holding  the  annual  meeting  for  the  election  of  di- 
rectors is  fixed  by  statute,2  that  the  business  to  be 
transacted  at  a  regular  meeting  is  substantially  con- 
fined to  amending  the  by-laws,3  and  the  filling  of  va- 
cancies in  office  (which  in  practice  is  left  to  the  board 
of  directors),  it  is  inadvisable  to  provide  in  the  by- 
laws for  waiving  notice  of  the  holding  of  regular  meet- 
ings of  stockholders  and  it  is  much  simpler  to  con- 
sider as  special  meetings  all  meetings  of  stockholders 
other  than  the  annual  meeting  for  the  election  of  di- 
rectors. Where  no  other  provision  is  specially  made 
by  law,  the  by-laws  may5  and  should  provide  for  the 
time,  hour,  day  and  month  of  each  year,  the  numbev 
of  the  street  address  or  room  of  building  at  the  city 
and  county  in  the  state  of  California  named  in  the 
articles  of  incorporation  or  certificate  changing  the 
place  ,and  the  length  of  time  the  notice  shall  be  given 
and  the  manner  of  giving  the  notice  to  stockholders.6 
If  provision  is  made  for  mailing  the  notice,  care 
should  be  taken  to  require  the  secretary  to  mail  the 
notices  enclosed  in  envelopes  without  any  note  thereon 
for  return  within  the  length  of  time  notice  is  re- 
quired to  be  given,  as  in  the  event  the  mailed  notice 
is  not  received  by  the  stockholder  addressed  the  mail- 
ing with  such  a  return  note  will  be  insufficient.7  Notice 
in  writing  is  waived  by  attendance  at  the  meeting  or 
by  notice  and  waiver  in  writing  which  is  presented 
and  made  a  part  of  the  records.8  The  by-laws  may 
not  dispense  with  notice  of  the  time  and  place  and 
the  notice  should  designate  the  nature  of  the  busi- 
ness to  be  transacted  at  a  special  meeting.9 

1  Civil  Code,   Section   305. 

2  Civil    Code,    Sections    301,    303. 

3  Civily   Code,    Section   304. 

4  Civil    Code,    Section    318. 

6  Civil   Code,    Section   303,    subd.    1. 

6  Civil    Code,    Section    319. 

7  Healton   v.   Morrison,   162   Cal.   668,    674. 

8  Civil   Code,    Section    317. 

9  Dolbear   v.   Wilkinson,   172   Cal.    369. 


52  By-Laws 

VOTING  AND  REPRESENTATION. 

Every  stockholder  has  the  right  to  vote  in  person 
or  by  proxy  the  number  of  shares  of  stock  owned  by 
him,1  and  only  the  stockholders  actually  present  in 
person  or  by  proxy  should  be  allowed  to  vote.2  Every 
person  acting  at  a  meeting  in  person  or  by  proxy  or 
by  representation  must  be  a  member  thereof  or  a 
stockholder  having  stock  in  his  own  name  on  the  stock 
books  of  the  corporation  at  least  ten  days  prior  to 
the  election.3  The  corporation  is  not  authorized  to 
close  its  stock  books  for  transfer  of  stock  either  for 
ten  days  or  any  lesser  time  prior  to  an  election.4  The 
stock  and  transfer  book  is  required  to  contain  an 
alphabetical  list  of  stockholders,6  which  constitutes  the 
voting  list.  This  may  lead  to  peculiar  situations.  The 
transferror  cannot  vote,  for  he  is  no  longer  a  stock- 
holder; the  transferee  within  the  ten  days  cannot  vote, 
under  the  express  provision  of  the  statute,  but  if  he 
transfers  his  shares  to  one  who  has  been  a  stockholder 
of  record  for  ten  days  the  shares  may  be  voted.  The 
constitutionality  of  this  provision  has  never  been  passed 
upon,  although  it  has  been  referred  to  a  number  of 
times.6  If  the  analogy  of  qualified  electors  at  a  polit- 
ical election  is  to  be  applied,  then  the  provision  requir- 
ing a  stockholder  to  be  such  of  record  for  ten  days 
prior  to  an  election  is  void  as  an  attempt  by  the  legis- 
lature to  require  qualifications  in  addition  to  those  of 
the  constitution.7  Since  1905,  the  qualification  of  stock- 
holders is  to  be  determined  by  the  stock  books.8  This 

1  Constitution,    Article    XII,    Section    12; 
Civil   Code,    Section   307. 

2  Civil    Code,    Section    321b. 

3  Civil    Code,    Section   312. 

4  Civil    Code,    Section    324. 

5  Civil   Code,   Section    378. 

6  Wright  v.   Central  California  C.   W.   Co.,   67   Cal.    532; 
Krause   v.    Durbrow,    127   Cal.    681; 

Smith   v.    S.    F.    &   N.   P.    Ry.    Co.,    115   Cal.    590. 

Royal   Con.   Mining  Co.   v.   Royal   Con.   Mines,   157   Cal.    737. 

7  Spier   v.   Baker,   120  Cal.    375. 
Bergevin    v.    Curtz,    127    Cal.    86. 

St.    Helena   v.    Merriam,    171    Cal.    134. 

8  Civil    Code,    Sections    312,    378; 

Middleton   v.    Arastraville   Mining   Co.,    146    Cal.    224. 


Voting  and  Representation  53 

rule,  however,  should  not  be  so  construed  as  to  permit 
stockholders  of  record  but  in  fact  holding  in  trust  for 
the  corporation  itself  to  vote  the  shares  of  stock  so 
held.9 

All  elections  must  be  by  ballot  and  every  stockholder 
has  the  right  to  vote  for  as  many  persons  as  there  are 
directors  to  be  elected,  or  to  cumulate  his  shares  and 
give  one  candidate  as  many  votes  as  the  number  of 
directors  multiplied  by  the  number  of  his  shares  of 
stock  shall  equal,  or  to  distribute  them  upon  the  same 
principle  among  as  many  candidates  as  he  shall  think 
fit  and  those  receiving  the  highest  number  of 
votes  shall  be  declared  elected.10  It  necessarily  fol- 
lows that  all  the  directors  must  be  elected  on  one 
ballot.11  This  may  result  in  the  stockholders  having  a 
minority  of  the  shares  electing  a  majority  of  the 
board  of  directors  through  the  failure  of  the  majority 
holders  to  distribute  their  votes,  or  one  holding  suf- 
ficient shares,  relying  upon  the  agreement  of  the  others 
may  fail  to  cumulate  his  votes  and  so  fail  of  an  elec- 
tion.12 Elections  have  been  held  valid  where  the 
number  of  directors  elected  was  less  than  that  pres- 
cribed by  the  charter,13  but  such  a  situation  is  to  be 
avoided,  for  there  is  then  no  real  vacancy  which  can 
be  filled  either  by  the  stockholders  or  the  direuors 
until  the  next  annual  election.  Where  it  appears  after 
the  delivery  of  the  ballots  to  the  tellers,  but  before  any 
canvass  or  result  of  the  election  is  announced,  that 
certain  stockholders  have  failed  to  mark  their  ballots 
"cumulative",  it  is  proper  to  permit  them  to  correct 
the  ballot  in  this  respect.14  The  by-laws  should  pres- 
cribe a  definite  time  during  which  the  polls  will  be 
open  for  the  election  of  directors,  but  where  they  do 
not  the  tellers  may  keep  the  polls  open  a  greater  length 

9     Market   St.    R.    R.    Co.    v.    Hellman,    109    Cal.        588; 
Brewster   v.   Hartley,    37   Cal.    27. 

10  Civil    Code,    Section    307. 
Constitution1,    Article    XII,    Section    12. 

11  Wright  v.   Central   etc.   Water   Co.,   67   Cal.    632. 

12  Dulin  v.   Pacific  Wood   etc.    Co.,    103    Cal.   357. 

13  Porter    v.    Lassen    etc.    Co.,    127    Cal.    270. 

14  Zierath   etc.    Drill   Co.    v.   Croake,    21   Cal.    App.    222. 


54  By-Laws 

of  time  than  that  prescribed  in  the  notice  of  the 
election  by  the  board  of  directors  without  invalidating 
the  election.15  Upon  the  request  of  any  stockholder  a 
vote  by  ayes  and  noes  must  be  taken  and  a  record 
made  thereof,  and  the  protest  of  any  stockholder  to 
any  action  or  to  any  proposed  action  must  be  copied 
in  full  in  the  journal.16  The  quorum  at  a  stockholders' 
meeting  is  fixed  at  a  majority  of  the  subscribed  cap- 
ital stock.17  Where  a  meeting  of  the  stockholders  ad- 
journs for  lack  of  a  quorum  or  no  election  of  directors 
is  held  at  the  time  appointed  the  reasons  therefor 
should  be  recorded  in  the  journal  of  proceedings  of  the 
board  of  directors.18  Where  the  percentage  of  the 
stock  required  on  a  proposition  is  fixed  by  statute  it 
cannot  be  changed  through  the  by-laws.  A  proposal 
to  change  the  number  of  directors  requires  an  affirma- 
tive vote  of  a  majority  of  the  subscribed  stock.19  An 
amendment  to  the  articles  of  incorporation20  or  the 
by-laws,21  or  a  proposition  to  increase  the  capital  stock 
or  bonded  indebtedness,22  or  to  sell  or  lease  the  prop- 
erty and  business,23  or  to  transfer  foreign  concess- 
ions.24 or  to  extend  the  term  of  its  existence25  each 
require  the  affirmative  vote  of  two-thirds  of  the  sub- 
scribed capital  stock. 

The  right  to  vote  by  proxy  is  conferred  by  the 
Constitution1  and  confirmed  by  the  Civil  Code,  which 
requires  every  proxy  to  be  executed  in  writing  by 
the  stockholder  himself  or  his  duly  authorized  attor- 
ney.2 No  proxy  is  to  be  valid  for  more  than  eleven 


15  Clopton    v.  Chandler,    27    Cal.    App.    595. 

16  Civil  Code,  Section    377. 

17  Civil  Code,    Section    312. 

18  Civil  Code,  Section    312. 

19  Civil  Code,  Section    361. 

20  Civil  Code,  Section    362. 

21  Civil  Code,  Section    304. 

22  Civil  Code,  Section    359. 

23  Civil  Code,  Section    361a. 

24  Civil  Code,  Section    364.  - 

25  Civil  Code,  Section   401. 

1  Constitution,    Article   XII,    Section*  12. 

2  Civil  Code,  Section    321b. 


Voting  and  Representation  55 

months  after  the  date  of  its  execution  unless  the  stock- 
holder executing  it  shall  have  specified  therein  the 
length  of  time  for  which  it  is  to  continue  in  force, 
which  in  no  case  must  exceed  seven  years  from  the 
date  of  the  execution  of  the  proxy,  and  be  revocable  at 
the  pleasure  of  the  person  executing  it.3  It  is  expiess- 
ly  provided  that  the  limitation  on  the  life  of  proxies 
is  not  to  be  construed  to  prevent  the  execution  of 
valid  pools  or  voting  trust  agreements  by  the  stock- 
holder of  a  corporation  organized  for  the  purpose 
of  marketing  agricultural  products.4  Whether  this 
section  has  aided  or  hindered  such  voting  trusts  is 
open  to  question,  as  the  provision  has  all  the  earmarks 
of  special  legislation,5  but  voting  trusts  created  at  the 
time  the  stock  is  transferred  or  an  interest  therein 
acquired,  where  not  oppressive  on  other  stockholders 
or  otherwise  unreasonable,  it  is  not  invalid.6  It  is 
doubtful  if  the  by-laws  can  limit  the  length  of  life 
of  the  proxy  to  less  than  seven  years.7  Many 
proxies  are  drawn  in  the  form  of  powers-of-attorney 
which  are  not  subject  to  the  limitation  specified,  as 
authorized  attorneys  may  give  proxies.8  The  by-laws 
may  not  provide  any  different  provisions  for  proxies 
by  married  women  than  apply  to  the  proxies  of  un- 
married women.9  A  proxy  to  vote  the  shares  of  the 
stockholder  is  generally  considered  insufficient  to 
authorize  the  proxy  holder  to  vote  on  matters  changing 
the  fundamental  contract  of  the  stockholders,  such  as 
extending  the  corporate  existence  or  authorizing  the 
conveyance  of  the  business,  franchises  and  property 
as  a  whole,  but  it  has  been  held  sufficient  to  vote  for 
the  creation  of  a  bonded  indebtedness.10  A  by-law 


3  Civil   Code,    Section    321b. 

4  Civil   Code,   Section   321c. 

6  Krause   v.    Durbrow,    127    Cal.    681. 

6  Smith  v.   San  Francisco  &  N.   P.   Ry.   Co.,   115  Cal.   584. 

7  Civil    Code,    Section    321b. 

Saline    Valley    Salt    Co.    v.    White,    177    Cal.    343. 

8  Civil    Code,    Section    321b. 

9  Civil   Code,    Section    325. 

10  Market  St.   Ry.   Co.   v.   Hellman,   109   Cal.   697. 


56  By-Laws 

which  provides  that  no  proxy  shall  be  voted  by  any 
one  not  a  stockholder  is  unreasonable  and  invalid.11 
A  guardian  of  a  minor  or  insane  person  and  the  exec- 
utor or  administrator  of  a  decedent  are  authorized 
to  represent  the  shares  of  the  ward  or  decedent12  and 
to  give  proxies.13  A  pledgee  or  trustee  may  vote 
the  shares  of  stock  pledged  or  held  in  trust  only  when 
the  pledger  or  beneficial  owner  fails  to  represent  the 
same.14  When  entitled  to  vote  a  trustee  may  give 
proxies.15  There  is  no  similar  provision  in  the  case  of 
a  pledgee.  Within  these  limitations  the  by-laws  may 
provide  the  mode  of  voting  by  proxy.16 


DIRECTORS:  NUMBER  AND  QUALIFICATIONS. 

The  number  of  directors  should  not  be  stated  in 
the  by-laws,  as  the  original  number  is  required  to  be 
stated  in  the  articles  of  incorporation1  and  the  holders 
of  a  majority  of  the  issued  stock  may  change  the 
number  without  amending  the  articles  of  incorporation 
or  by-laws.2  The  members  of  the  board  must  be 
holders  of  stock3  at  the  time  of  their  election  and  the 
acquisition  of  stock  thereafter  will  not  qualify  them.4 
A  majority  of  the  members  of  the  board  must  be  resi- 
dents of  this  state5  and  the  requirements  of  cumulated 
voting  make  an  entirely  new  ballot  necessary  where 
more  than  a  majority  of  the  directors  elected  are  non- 
residents. The  number  of  shares  of  stock  which  must 
be  held  by  a  stockholder  to  qualify  him  as  a  director 
may  be  fixed  by  the  by-laws,6  which  may  make  other 

11  Peoples    Bank    v.    Superior    Court,    104    Cal.    649. 

12  Civil    Code,    Section    313. 

13  Civil   Code,   Section    321b. 

14  Civil   Code,    Section    313. 

15  Civil    Code,    Section    321b. 

16  Civil  Code,  Section  303,  subd.   3. 

1  Civil    Code,    Section   290.    subd.    5. 

2  Civil    Code,    Section    361. 

3  Civil    Code,    Section    305. 

4  Robinson    v.    Blood,    151    Cal.    504. 

5  Civil   Code,   Section   305. 

6  Civil   Code,   Section   305; 

Waterbury   v.    Temescal    Water   Co.,    11    Cal.    App.    635 


Filling  Vacancies  57 

reasonable  qualifications.7  Where  a  director  parts  with 
all  of  his  snares  he  divests  himself  of  his  title  to  of- 
fice as  a  director  de  jure*  There  is  no  provision  of 
statute  preventing  the  corporation  in  its  by-laws  mak- 
ing one  of  the  qualifications  of  a  director  to  be  the 
ownership  of  either  common  or  preferred  shares  and 
thus  securing  control  of  the  business  of  the  corpora- 
tion to  owners  of  one  class  of  stock,  an  object  pre- 
vented in  another  manner  by  the  decision  in  Film  Pro- 
ducers v.  Jordan?  The  by-laws  should  definitely  state 
whether  a  stockholder  to  qualify  as  a  director  may  be 
merely  a  dummy  holder  of  record  on  the  stock  books, 
or  must  be  a  bona  fide  owner  in  his  own  right,  this 
question  in  default  of  a  by-law  having  been  discussed 
but  not  decided.10  The  by-laws  should  also  state  def- 
initely that  an  executor,  administrator,  guardian  or 
trustee  is  not  qualified  as  a  director  by  virtue  of  his 
right  to  represent  the  stock  of  his  decedent,  ward  or 
beneficiary,  unless  he  shall  have  the  shares  trans- 
ferred into  his  own  name. 

FILLING  VACANCIES. 

Whenever  a  vacancy  occurs  in  the  office  of  director, 
unless  the  by-laws  of  the  corporation  otherwise  pro- 
vide, such  vacancy  must  be  filled  by  an  appointee  of  the 
board.1  The  stockholders,  when  assembled  at  a  gen- 
eral or  special  meeting,  regularly  called,  may  elect  of- 
ficers to  fill  all  vacancies  then  existing.2  Where  the 
number  of  directors  is  increased  or  diminished,  there 
is  no  statutory  provision  for  their  selection.3  The  by- 
laws, therefore,  should  provide  in  each  such  case  how 
the  vacancy  shall  be  filled4  and  in  case  of  an  increase 


7  'Civil   Code,    Section    303. 

8  Seal   of  Gold   Mining  Co.   v.   Slater,   161   Cal.    621. 

9  Film    Producers    v.    Jordan,    171    Cal.    664. 
10  O'Neil    v.    Donahue,    67    Cal.    226; 

Moore   v.   Boyd,    74    Cal.    167. 

1  Civil    Code,    Section    305. 

2  Civil   Code,    Section    318. 

3  Civil   Code,    Section    361. 

4  Civil   Code,    Section    305. 


58  By-Laws 

in  the  number  of  directors  the  election  should  be  b) 
the  stockholders.  By  an  abuse  of  this  power  a  major- 
ity of  the  stock  by  first  reducing  and  then  increasing' 
the  number  of  directors  can  destroy  the  right  of  min- 
ority representation  on  the  board  by  cumulative  vot- 
ing. Where  a  vacancy  is  caused  by  failure  of  the 
stockholders  to  c;ect  the  full  number  of  members  of 
the  board  of  directors  it  is  at  least  doubtful  whether 
either  the  beard  or  the  stockholders  can  fill  such  a 
vacancy  before  the  next  annual  election5  except  by 
first  removing  all  the  members  of  the  existing  board. 

POWERS  AND  DUTIES. 

The  corporate  powers,,  business  and  property  of  all 
stock  corporations  for  profit  organized  under  the  pro- 
visions of  the  Civil  Code  must  be  exercised,  conducted 
and  controlled  by  a  board  of  not  less  than  three  di- 
rectors to  be  elected  from  among  the  holders  of  the 
stock."1  It  is  appaient  that  this  statute  lodges  in  the 
board  of  director.^  the  power  to  sue  and  be  sued,  to 
mak^  and  use  a  common  seal  and  to  alter  the  same  at 
pleasure,  to  purchase,  hold  and  convey  such  real  and 
personal  estate  as  the  purposes  of  the  corporation 
may  require,2  not  exceeding  the  amount  limited  by 
law.3  Where  no  provision  is  specially  made  the  by- 
laws may  provide  for  the  duties  of  directors,4  who 
must  perform  the  duties  enjoined  on  them  by  law 
and  the  by-laws  of  the  corporation.6  The  violation 
by  the  board  of  any  by-law  with  respect  to  dealings 
with  third  parties  may  subject  them  to  the  penalty 
provided  in  the  by-laws,  not  exceeding  in  any  case 
one  hundred  dollars  for  ony  one  ofTense,6  but  it  cannot 

5     Porter   v.    Lassen    Co.,    127    Cal.    261,    270; 

Wright   v.   Central    etc.   Water    Co.,    67    Cal.    532. 

1  Civil  Code,  Section    305. 

2  Civil  Code,  Section   354. 

3  Constitution,    Article    XII,    Section    9; 
Civil  Code,  Section    360. 

4  Civil  Code,  Section   303,   subd.    4. 

5  Civil  Code,  Section    308. 

6  Civil  Code,  Section    308,   subd.    7. 


Directors  Powers  and  Duties  59 

affect  the  validity  of  the  act  performed  if  within  the 
purposes  of  the  corporation,  even  though  the  third 
party  was  charged  with  notice  of  the  by-law  by  reason 
of  its  being  copied  or  stated  in  the  book  of  by-laws.7 
What  the  board  of  directors  does  within  the  scope  of 
the  objects  and  purposes  of  the  corporation  the  cor- 
poration does,8  but  officers  are  charged  with  knowledge 
of  the  mode  of  executing  contracts  required  by  the  by- 
laws.9 In  dealing  with  the  powers  and  duties  of  di- 
rectors, the  by-laws  should  be  confined  either  to  con- 
firming the  statutory  powers  of  the  board  of  directors, 
or  to  providing  the  manner  of  making  contracts  and 
conveyances,  and  the  reports  and  records  thereof  to  be 
kept  by  the  corporation.  The  acts  of  the  directors 
gain  no  validity  by  being  authorized  or  ratified  by 
the  stockholders.10  It  is  the  directors  when  assembled 
as  a  board  and  not  when  acting  as  individuals  that 
are  authorized  to  exercise  the  power  of  the  corpora- 
tion11 unless  the  owners  of  all  the  shares  are  present. 
Acts  of  the  directors  in  violation  of  the  by-laws  may 
be  ratified  by  the  holders  of  the  same  number  of 
shares  that  would  be  necessary  to  amend  them.12 

Where  no  other  provision  is  specially  made,  a  cor- 
poration may  provide  in  its  by-laws  for  the  manner 
of  election  and  tenure  of  office  of  all  officers  other  than 
directors.1  Every  corporation  as  such  has  power  to 
appoint  such  subordinate  officers  or  agents  as  the  busi- 
ness of  the  corporation  may  require  and  to  allow  them 
suitable  compensation.2  These  powers  of  the  corpora- 
tion are  vested  in  the  board  of  directors.3  The  by-laws 
may  provide  the  term  of  office  of  the  president,  secre- 
tary and  treasurer,  conditioned  upon  its  terminating 

7  Civil    Code,    Section    304. 

8  Maynard   v.   F.   F.   Ins.   Co.,    34   Cal.   *8,   54. 

9  Colpe  v.   Jubilee  Mining  Co.,   2  Cal.   App.   393,   397. 

10  Bassett    v.    Fairchild,    132    Cal.    651. 

11  Gashwiler    v.    Willis,    33    Cal.    19; 

Alta   Silver   Mining   Co.    v.    Placer  Mining  Co.,    78    Cal.    632 

12  Underbill   v.   Santa   Barbara   etc.   Co.,   93   Cal.   S12. 

1  Civil   Code,    Section*  303,   subd.   6. 

2  Civil   Code,   Section    354,    subd.    3. 

3  Civil    Code,    Section    305. 


60  By-Laws 

with  the  life  of  the  board  of  directors  by  which  they 
are  elecetd.4  Where  the  by-laws  do  not  fix  the  term 
of  office  the  board  of  directors  has  power  to  dismiss 
the  officers  summarily.5  Where  the  by-laws  prescribe 
the  duties  of  an  officer,  such  as  the  manager,  and  are 
known  to  him,  they  enter  into  and  become  a  part  of 
his  contract  of  employment,6  and  where  the  board  of 
directors  does  not  dispute  the  power  the  by-laws  may 
likewise  confer  power  on  officers  to  deal  with  third 
parties.7  The  statutory  duties  of  one  officer  cannot 
be  allotted  to  any  other  officer,  but  there  is  no  pro- 
vision preventing  the  same  person  holding  two  statu- 
tory offices;  the  office  of  president  and  secretary  should 
not  be  held  by  the  same  person,  as  the  statute  in  some 
instances  requires  both  to  act  in  relation  to  the  same 
matter.  The  president  is  the  only  officer  required  by 
statute  to  be  a  stockholder  and  director,8  but  the  by- 
laws should  make  the  same  qualification  for  vice-pres- 
idents. 

MEETINGS 

Where  no  other  provision  is  specially  made,  the  by- 
laws may  provide  the  time,  place  and  manner  of  calling 
and  conducting  the  meetings  of  its  board  of  directors 
and  may  dispense  with  notice  of  all  regular  meetings.1 
Immediately  after  their  election  the  directors  must  or- 
ganize by  the  election  of  a  president,  who  must  be  one 
of  their  number,2  a  secretary  and  a  treasurer.  "Imme- 
diately" as  here  used  does  not  mean  instanter,  but 
within  a  reasonable  time,3  and  the  by-laws  should  pro- 
vide definitely  the  notice  to  be  given  to  each  newly 
elected  director  of  the  fact  of  his  election  and  of  the 


4  Civil    Code,    Section    308. 

5  Civil    Code,    Section    308. 

5  Savings    etc.    Society   v.    Wennerhold,    81    Cal.    535. 

6  San    Pedro   Lumber   Co.    v.    Reynolds,    121    Cal.    79. 

7  Humboldt    etc.    Society    v.    Wennerhold,    81    Cal.    528. 

8  Civil    Code,    Section    308. 

1  Civil   Code,    Section   303. 

2  Civil    Code,    Section    308. 

9  McVilly   v.    Flentge,    54    Cal.    Dec.    679. 


Directors  Meetings  61 

time  of  the  first  meeting;  otherwise  the  board  might 
be  organized  by  a  mere  majority  of  a  quorum.  Meet- 
ings must  be  held  at  the  office  of  the  company  or  at 
its  principal  place  of  business.4  Whether  the  office 
must  be  at  the  principal  place  of  business  is  a  much 
disputed  question,  but  unless  there  is  some  real  neces- 
sity to  the  contrary  the  by-laws  should  locate  the  office 
at  the  principal  place  of  business.5  Assessments  have 
been  held  invalid  where  the  meeting  was  held  at  a 
different  place,  although  otherwise  regular.  Unless 
the  by-laws  fix  the  office  of  the  corporation,  provided 
it  is  retained  at  the  principal  place  of  business  indi- 
cated in  the  articles,  its  location  is  a  matter  committed 
to  the  discretion  of  the  board  of  directors.6  A  quorum 
is  fixed  at  a  majority  of  the  directors  which  is  de- 
clared to  be  a  sufficient  number  to  form  a  board  for 
the  transaction  o*  business  when  duly  assembled,7  and 
Amless  a  quorum  is  present  and  acting,  no  business 
performed  or  act  done  is  valid  as  against  the  corpora- 
tion.8 No  director  interested  in  a  proposition  being 
voted  upon  may  be  counted  to  make  up  a  quorum9 
unless  the  directors  are  the  only  stockholders,  all  con- 
cur and  no  adverse  interests  of  creditors  are  involved.10 
A  quorum  is  a  majority  of  the  entire  board  as  it  would 
be  constituted  if  all  the  vacancies  were  filled,  and  not  a 
majority  of  the  board  as  it  remains  with  vacancies 
Unfilled.11 

In  the  absence  of  a  by-law,  both  regular  meetings 
and  special  meetings  can  be  called  on  the  order  of  the 
president  by  notice  in  writing  given  to  each  director 
by  the  secretary,  and  it  is  only  where  there  is  no  pres- 
ident that  two  directors  are  authorized  to  call  the 
meeting.12  The  by-laws  should  therefore  fix  with  cer- 

4  Civil  Code,   Section   319. 

5  Gallup   v.    Sacramento   etc.    Drainage   Dist.,    171   Cal.    74. 

6  Seal   of  Gold  Mining  Co.   v.   Slater,    161   Cal.    621.   629. 

7  Civil    Code,    Section    308. 

8  Civil    Code,    Section    305. 

9  Curtin    v.    Salmon    River    etc.    Co.,    130    Cal.    345,    349. 

10  Sargent   v.    Palace    Cafe.    Co.,    175    Cal.    737. 

11  Porter    v.    Lassen    etc.    Co.,    127    Cal.    270. 

12  Civil    Code,    Section    320. 


62  By-Laws 

tainty  the  authority  of  the  vice-president  or  directors 
to  call  a  special  meeting  in  the  absence  of  the  presi- 
dent from  the  office  or  principal  place  of  business,  and 
of  some  other  person  to  give  the  notice  in  the  absence 
of  the  secretary.13  Where  the  by-laws  so  provide,  a 
call  by  the  vice-president  is  valid.14  The  notice  of  a 
special  meeting  need  not  specify  the  purpose  of  the 
meeting  unless  the  by-laws  so  require.16  When  all 
the  directors  are  present  and  sign  a  written  consent  on 
the  records  of  the  meeting,  and  if  a  quorum  is  present 
and  those  not  present  sign  a  waiver  of  notice  which 
is  presented  at  and  made  a  part  of  the  records  of  the 
meeting,  the  transactions  of  such  meeting  are  valid.16 
This  does  not  permit  a  ratification  by  waiver  and  con- 
sent signed  after  the  meeting  is  held.  Where  there 
is  any  doubt  as  to  the  regularity  of  the  call  or  waiver, 
each  item  of  business  transacted  should  be  ratified  and 
confirmed  at  a  later  meeting  regularly  called  and  held. 
The  by-laws  should  definitely  fix  the  power  of  a 
quorum  to  adjourn  a  meeting  and  the  motion  should 
specify  the  hour  of  re-assembling17  at  a  time  not  later 
than  the  next  regular  meeting;  and  where  there  is  such 
provision,  a  director  is  charged  with  knowledge  of  the 
power  of  a  quorum  to  adjourn  a  regular  meeting,  and 
if  he  receives  notice  of  a  special  meeting  he  is  bound 
to  know  that  a  quorum  might  adjourn  and  that  busi- 
ness might  be  transacted  at  the  adjourned  meeting.18 
A  minority  of  the  board  has  no  power  to  adjourn  for 

any  purpose.19 




13  Curtin   v.   Salmon   River   etc.    Co.,   130   Cal.    345. 

14  Bell    v.    Standard    Quicksilver   Co.,    146    Cal.    699. 

16  Seal   of  Gold   Mining   Co.   v.    Slater,    161    Cal.    621,    628 

16  Civil    Code,    Section    320a. 

17  Reed    v.    Wing,    168    Cal.    711. 

19  Raisch   v.   M.    K.   &   T.   Oil   Co.,    7   Cal.   App.    667. 


UNI 


NIVERSITY   OF   CALIFORNIA   LIBRARY, 
BERKELEY 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED   BELOW 

Books  not  returned  on  time  are  subject  to  a  fine  of 
50c  per  volume  after  the  third  day  overdue,  increasing 
to  $1.00  per  volume  after  the  sixth  day.  Books  not  in 
demand  may  be  renewed  if  application  is  made  before 
expiration  of  loan  period.  


!6Jan'57CB 


50m-7,' 


